By Nadia Damouni and Olivia Oran
NEW YORK May 18 Lead Facebook Inc
underwriter Morgan Stanley took a bet earlier this week
when it increased the size of the social networking firm's $16
billion initial public offering and it boosted the price.
Thanks to massive hype surrounding Facebook's historic
public offering, the wager looked safe. But a rocky first day of
trading has raised questions about whether it paid off.
After a delayed start to trading, Facebook's shares spent
much of the day struggling to stay above the $38 IPO price - and
ended with just a 23-cent gain.
As a result, Morgan Stanley may have spent billions of
dollars to support the stock price by buying shares in the
market. Some market participants said that the underwriters had
to absorb mountains of stock to defend the $38 level and keep
the market from dipping below it.
The firm did this by tapping into a 63 million share
over-allotment option, or greenshoe, according to sources
familiar with the deal.
As an indication of the cost, had Morgan Stanley bought all
of the shares traded around $38 in the final 20 minutes of the
day, it would have spent nearly $2 billion. Underwriters are not
obligated to prop up a stock on debut, but typically do.
Morgan Stanley declined to comment.
The debut marks a rare stumble for a high-profile IPO.
Facebook is the only recent U.S. internet listing not to enjoy a
large price jump on its first day of trading. LinkedIn ,
Groupon and Pandora Media all saw significant
gains at their public debuts.
The debut also underscores Morgan Stanley's go-it-alone
handling of the offering process. Though 32 other underwriters
signed on to the deal, Morgan Stanley retained tight control
over information, decisions and allocations of shares, according
to other underwriters.
To be sure, Morgan Stanley's strong approach may have been
crucial to managing such a large, high-profile offering with so
many underwriters. And the fact that the stock didn't soar on
its first day means they achieved full value for their client.
Some issues were beyond Morgan Stanley's control. Glitches
at the Nasdaq stock exchange delayed the start of trading by 30
minutes, and throughout the day many investors did not receive
confirmations that their orders had been completed, brokers at
Morgan Stanley, Raymond James & Associates and others said. That
uncertainty about their positions may have prompted some
investors to sell, worsening the downward pressure on the
Nasdaq posted a notice late in the day saying that orders
entered for the stock before trading started "resulted in
nothing being done" and offering to match orders if customers
send in requests by Monday. Sources said the exchange was
working through the weekend to deal with the botched trades.
Facebook also altered its guidance for research earnings
last week, during the road show, a rare and disruptive move.
In many ways, the deal is a crowning moment for Morgan
Stanley. When it won the coveted role as Facebook's primary
underwriter for its IPO, veteran technology banker Michael
Grimes managed to convince executives at the social media giant
that his bank would single-handedly control the process.
And as Grimes, co-head of global technology investment
banking, boarded a Bombardier Global Express jet at Mineta San
Jose International Airport with Facebook executives last week
along with Morgan Stanley Internet banker Marcie Vu -- according
to documents obtained by Reuters -- he had effectively
accomplished his goal.
Successfully pulling off one of the largest IPOs in U.S.
history would underscore Morgan Stanley's status as the top
underwriter for tech offerings and set it above arch rival
Goldman Sachs , with total global proceeds last year of
$2.2 billion, according to Thomson Reuters data. But even with
high profile deals like LinkedIn and Zynga under its
belt, Morgan Stanley had to be careful.
And so the bank led a highly secretive, tightly controlled
process in which other institutions -- including top
underwriters JPMorgan Chase & Co and Goldman -- were
effectively shut out.
"There was some frustration by JPMorgan and Goldman, as they
were getting limited information. They thought they would
be more inside the process," one source close to the matter
Goldman Sachs declined to comment. JPMorgan did not return
calls seeking comment.
For its efforts, Morgan Stanley will receive 38 percent of
the overall IPO fees, about $67 million, which is more than
JPMorgan and Goldman combined, according to regulatory filings.
But more importantly, Morgan Stanley was the only bank
actively talking to investors on the deal and able to pull the
order book together, a rare feature for IPOs where top
underwriters typically split the work more evenly.
At one of the venues during the investor roadshow, dozens of
fund managers congregated at the St. Regis Hotel in New York
including Neuberger Berman, SAC Capital Advisors LP, Soros Fund
Management LLC, Tiger Global Management LLC and Och Ziff Capital
Management Group LLC, trying to get a piece of the pie,
according to the sources.
Representatives for Neuberger Berman, Tiger Global and Och
Ziff declined to comment. The other funds were not immediately
available for comment.
With almost all 33 Facebook underwriters kept in the dark
about the deal, including additional changes to terms such as
pricing range and IPO size, one underwriter called the process
the "Morgan Stanley show" while another underwriter said the
bank is "essentially running it by themselves."
JPMorgan pulled out all the stops when Facebook executives
visited its New York headquarters. A Facebook-branded flag
adorned the building and the bank gave out Facebook baseball
hats and coffee cup holders. But the moves "mostly attracted
press," said one source.
Facebook Chief Financial Officer David Ebersman and VP of
Finance & Treasurer Cipora Herman were the primary executives
working with underwriters, a separate source close to the matter
said. Facebook Chief Operating Officer Sheryl Sandberg also
remained actively involved.
Ebersman had been very thorough in his thinking throughout
the process, one of the sources close to the matter said,
considering everything from the more transparent Dutch Auction
process that Google Inc used to a directed shares
program. In the end, Facebook decided it wanted a traditional
Their thought was to "bring in the right shareholders" as
part of the IPO process and not get tangled up in other
strategies that would be disruptive to the running of Facebook's
business, the source said.
Zuckerberg was less involved, and also chose not to attend a
majority of the roadshow stops last week, other than a brief
appearance in his trademark hooded sweatshirt on May 7 at the
Sheraton Hotel in New York and then again in Palo Alto that
The roadshow -- in which Zuckerberg was treated less as CEO
and more as rockstar -- only lasted nine days rather than the
Security was so tight that in New York attendees were asked
for multiple forms of identification and were cross- checked
against a list of names. According to one source, even one of
Morgan Stanley's equity sales heads had difficulty entering the
roadshow lunch because his name was accidentally left off of the
Until late Thursday night, co-managers were still left in
the dark about their allotments and if they were even going to
get shares, said one underwriter who preferred anonymity because
the talks are private.
"Everything was very hush hush," he said.