Facebook (Nasdaq:FB) finally went public and did not double or triple over night. Boo hoo boo hoo. Lots of investors if you can call them that want to blame Morgan Stanley (NYSE:MS). This white shoe firm is surely at fault because investors could not double their money over night. And that as we know is Morgan Stanley’s grievous error. Please note that some 33 other firms that were part of the underwriting syndicate are keeping a low profile and desperately trying to keep their names out of the financial pages. OK so the most anticipated IPO in recent financial memory seems to be crapping out. What to look for who to blame?
Morgan Stanley and 33 other large Wall Street investment banks were hired to bring the company public. Their contractual obligation is to Facebook. Their fees will be paid by Facebook. Certain expenses will be paid by Facebook. So we can assume their primary fiduciary responsibility is to Facebook. Search the underwriting documents and I seriously doubt if there is a responsibility to ensure investors double their money over night. In fact there was a lot of boilerplate about risk which many investors even at large sophisticated investment funds probably do not read or contemplate.
Morgan Stanley’s own internet analyst Scott Devitt came out in the last-minute and warned about lower revenues than first anticipated. A nice touch for any lawyer defending Morgan Stanley. This move probably saved Morgan Stanley from a lot of lawsuits. I couldn’t help but check out Morgan Stanley’s recent price history. It has done well. Facebook has been very good to Morgan Stanley.
What is the duty of senior Facebook executives? Maximize the valuation. They seem to be successful. I have always been disturbed by underwriting which soar in price once shares start trading. why could not the CFO get the best possible deal for the company he works for. Why could the CFO not maximize the amount of valuable cash being raised. Tech giants need enormous amounts of cash. soaring share values in the secondary market do not fill the corporate treasury.
The Morgan Stanley performed admirably in this case. They wrenched the last nickel out of the market. This by the way maximizes their own fees and would therefore give investors an insight into probable behaviours. They were able to increase both the initial offer price as well as the total amount of shares being offered. In the underwriting world this is like dying and going to heaven. This only happens when investors with cash in hand are scream buy buy buy.
Internet valuations have always defied conventional old school investment logic. Facebook was clever, they hired a very prestigious name to stand behind them. They then assembled an equally prestigious posse. Then they let the investors do it to themselves. This may be a tipping point for the market. The internet mania still continues to attract short-term speculative thinking and trading. Now Facebook and others to come may be priced at more realistic levels. Allowing saner money the opportunity to just dip their beaks once in a while.
George Gutowski writes from a caveat emptor perspective.
- Morgan Stanley analyst cut Facebook revenue forecasts during IPO roadshow (mercurynews.com)
- Did Facebook IPO investors ‘freak’ after Morgan Stanley cut its revenue target? (theglobeandmail.com)
- The Facebook earnings-forecast scandal (blogs.reuters.com)