Silicon Valley isn’t quite ready to dump Morgan Stanley over the Facebook initial public offering (IPO) fiasco.
It could be said that playing a role in botching the world’s biggest tech IPO would be enough to kick its lead banker out of the club, or at least to the curb. But a tarnished image had not necessarily dented Morgan Stanley’s position as a go-to underwriter for Silicon Valley, bankers, venture capitalists and start-ups said.
The reasons run from the unusual size of the Facebook deal – a $16 billion (R133.8bn) offering – to blaming the Nasdaq, to the strong relationships Morgan Stanley’s lead tech banker Michael Grimes and his team have crafted over the years with deep-pocketed venture capitalist firms and executives in the San Francisco Bay Area.
A week after the Facebook fallout, Silicon Valley sources said Morgan Stanley was counting on these strengths to trump investor anger and lawsuits related to its analyst’s move to cut his forecasts for Facebook’s revenue and earnings just days ahead of the IPO and then only tell the firm’s major clients rather than publish those revisions widely.
“It’s still going to be the rare occasion when somebody who has the chance to have them, leaves them out,” said NEA venture capitalist Scott Sandell, speaking about Morgan Stanley and its main rival in the Valley, Goldman Sachs.
Morgan Stanley was the biggest bookrunner for US technology IPOs last year, advising on 16 of the 37 new issues, according to data. So far this year, it has held on to that top spot.
At least half a dozen high-profile technology companies with pending IPOs, including Palo Alto Networks and ServiceNow, have already selected Morgan Stanley as a lead bookrunner. And those were not expected to be derailed, or delayed, said sources close to the matter. A Palo Alto Networks spokesperson declined to comment. ServiceNow was not available for comment.
“I still think very highly of Morgan Stanley,” said Jef Graham, a serial entrepreneur and currently the chief executive of RGB Networks, an online video-advertising company that could go public next year.
One reason is tech issuers know the big mutual funds and other institutional investors who will buy the largest chunks of their shares respect Morgan Stanley, in part because the bank is very selective about the issuers it represents.
“Goldman and Morgan Stanley on your (prospectus) cover recently – it’s been a stamp of approval,” said Revolution venture capitalist Tige Savage.
Leading tech investors said that while Morgan Stanley was being thrown under the bus for some of the unprecedented events surrounding Facebook’s IPO, there was plenty of blame to go around.
“Morgan Stanley’s services are a commodity and it is hard to blame them specifically because there are many people involved in the decision,” said one of the investors, requesting anonymity.
The bank on Thursday also pointed the finger at the Nasdaq for not getting trade execution data from the exchange in a timely way on the initial day of trading.
The final line of defence for Morgan Stanley that’s now doing the rounds of the Valley: The Facebook IPO was a one-off – a giant offering in social media, a relatively untested sector any bank could have mishandled.
“It’s a problem with the IPO system, not Morgan Stanley specifically. If it was another bank they would have had similar problems,” a hedge fund manager said.
“There may be some short-term decisions that go to other banks. But it’s not like any other bank would have been less incompetent on the Facebook IPO.”
Amid a flurry of headlines this week about subpoenas and lawsuits against the firm, tech start-ups are keenly aware Morgan Stanley did succeed with Facebook by an important metric – making sure a company got the maximum amount of cash.
If things go wrong, entrepreneurs know the bank has the resources to step in and buy shares to support the stock, as Morgan Stanley did on Friday, Facebook’s first day of trading and the only day it closed above its IPO price. Though the effort to keep the stock above $38 a share proved fleeting, the move will likely be a positive for future clients.
Morgan Stanley may still face tougher scrutiny post-Facebook.
“What was perceived as the best of the best got the Facebook offering, and the general perception was it wasn’t handled perfectly,” said Revolution’s Savage. “They now have a question to answer they didn’t have before.”
Bankers said another way this rippled through the Valley, was companies could solicit advice more frequently and carefully from all their major underwriters, not just the bank in the prime position, known as “lead left” – a term for the underwriter on the top left-hand side of the IPO prospectus.
“Having a real joint lead on an IPO – that’s the counter argument that has emerged from this,” said one investment banker from a rival firm.
But at this point, Silicon Valley is still expected to court Morgan Stanley. “There’s a little bit of a tarnish on the Morgan Stanley brand versus where they were a week ago. But is it going to prevent them from being picked? I don’t think so,” another rival investment banker said. – Reuters