Morgan Stanley wins bragging rights
Lead underwriter on public offering stands to reap millions of dollars in ‘once-in-a-generation event’
Morgan Stanley, which has not had much joy in a rough year for Wall Street, had reason to celebrate on Wednesday.
As the lead underwriter on Facebook’s initial public offering, the firm will reap not only millions of dollars in fees, but more important, the bragging rights that come with what bankers described as a once-in-a-generation event.
At Facebook, it had been clear for some time that Morgan Stanley would help shepherd the company to the public markets.
The Wall Street firm had led the prominent IPOS of Linkedin, Groupon and Zynga. And Michael Grimes, the leader of Morgan Stanley’s office in Menlo Park, Calif., had steered the firm’s tech team through the dot-com bust and forged relationships with the venture capital firms that have incubated today’s tech giants.
So a vexing question for Facebook executives as they prepared to go public was: What sort of role should go to Goldman Sachs, Morgan Stanley’s chief rival in winning IPO assignments?
Goldman’s reputation has taken serious hits in recent years. A series of events, from a Securities and Exchange Commission lawsuit in 2010 that accused the firm of creating a mortgage product that was intended to fail to Goldman’s handling of a $1.5-billion investment in Facebook itself last year, have led to criticism of the firm.
Facebook executives, say people briefed on the matter, weighed how the bank’s record might affect its own reputation. So while many people still expected Goldman to be the runner-up among underwriters, it was JPMORgan Chase that took the No. 2 spot in the Facebook prospectus’ listing on Wednesday.
It was surprising given that JPMORgan is relatively untested in leading technology IPOS, but helps illustrate the firm’s rise in recent years. The bank had played a full-court press to win over Facebook, with its chief executive, Jamie Dimon, forming a rapport with Facebook’s chief operating office, Sheryl Sandberg. The bank’s top deal- maker, James B. Lee Jr., meanwhile, regularly led pitches to Facebook executives.
One advantage was Jpmorgan’s strength as a lender, having helped create a credit facility that provided Facebook with ample cash.
Still, the banks were in the dark about whether they stood in Facebook’s good graces until a few weeks ago.
Three other firms round out the underwriting syndicate so far: Bank of America-merrill Lynch, Barclays Capital and Allen & Co.
“This is a great thing for people’s tech practices,” Peter Falvey, a managing director at Morgan Keegan, said. “It’s such a unique asset and such a highly anticipated offering that it has significant franchise value.”
Such is Facebook’s prominence that banks are willing to work for a much lower fee than usual. The company is expected to pay its advisers a fee as low as one per cent of proceeds raised, according to a person briefed on the matter. That would be far below the norm of three per cent to seven per cent, though the size of Facebook’s offering guarantees a still-handsome payout.
That low fee is reminiscent of what General Motors paid in its “RE-IPO” in the fall of 2010: an eye-popping 0.75 per cent. There, however, the selling shareholder was the federal government.
With an expected valuation of $75 billion to $100 billion, Facebook will be among the biggest companies to seek the public markets in recent memory. Recent trades on Sharespost, a secondary market for Facebook stock, valued the company at as much as $89 billion.
Even with a fundraising target of $5 billion — a preliminary figure that will almost surely grow over time — Facebook’s offering trails only the $5.9 billion that Infineon Technologies’ IPO raised in 2000. And it is more than twice as big as Google’s $1.9-billion initial offering nearly eight years ago.
The road to landing a coveted underwriting role began years ago, according to people briefed on the matter. It meant forming relationships with Facebook co-founder Mark Zuckerberg, who viewed Wall Street bankers with some skepticism.
It also meant winning over top executives like Sandberg and Facebook’s finance chief, David Ebersman, who would oversee the IPO process. Bankers also courted influential Facebook investors like James W. Breyer of Accel Partners and Yuri Milner of DST Global.
Bankers and analysts had long assumed Morgan Stanley and Goldman Sachs were the front-runners. Together, the two firms underwrote nearly 14 per cent of IPOS worldwide last year, raising $22.3 billion in proceeds for their clients, according to data from Thomson Reuters. Goldman ranked first, with 54 offerings that raised $11.9 billion.
Yet within Silicon Valley, Morgan Stanley has a nearly matchless reputation. In making their pitch to Facebook to be lead underwriter, Morgan Stanley bankers promoted their firm’s ability to sell huge amounts of stock through its retail brokerage network — an ability that appealed to Facebook, according to a person briefed on the matter.
Goldman had its own cards to play, having also worked on Groupon and Zynga. It also led a $500-million investment in Facebook last year and sold an additional $1 billion worth of stock to wealthy foreign private clients. But the latter led to embarrassing questions about potential securities regulation violations, hamstringing Goldman’s efforts.