Maria Bartiromo of CNBC interviewed James Gorman, Chairman and CEO of Morgan Stanley (MS), after the stock market closed. The principal topic of conversation was the Facebook IPO. MS is the lead underwriter in the transaction. Facebook closed today at $29.60, up $1.41, or 5%. The price is off 22% from the IPO price.
Bartiromo began the discussion by playing a tape of comments made by a critic of the FB transaction who said FB overreached, and there should have been no upsizing of the transaction. It appeared the interviewer wanted to unsettle Gorman but was unsuccessful. He responded that the critic was not involved in pricing conversations, and so, he really did not have any insight. Price expectations around the world were much higher than the offering price, $70 in one case. The underwriters were matching demand to price, while, at the same time trying to get a fair price for the selling shareholders to compensate them for their successes and the risks they assumed since the inception of FB.
Gorman said the deal is one of the most volatile ever, and one of the largest as well. That said, the FB company now has 900 million users and is a great company that should do very well over time. The IPO is only eight days old, and it is too early to judge the transaction, according to Gorman.
The banker explained that the deal was consummated at the top of the “revised pricing range” established by the underwriters. He said on opening day there existed unprecedented confusion and disarray relating to trading prices and shares purchased, an obvious pot shot at NASDAQ, the exchange that took FB public.
He related that those who expected a “pop” in the price of the stock were naïve. The deal was priced for long-term investors; he implied, but did not say, that patience would be rewarded over time, and the stock flippers got what they deserved.
Gorman reviewed the IPO process, which I described in an essay yesterday. An S-1 with all the pertinent information about the company was available to potential investors before the offering. It was amended to reflect some new negative information from analysts. The orders were still strong after the new disclosures and MS, Gorman said, followed all the rules relating to the emergence and distribution of new data. Bartiromo implied that perhaps some investors received information sooner, or were briefed by MS. Once again, Gorman explained that no rules were broken in the process.
Bartiromo then discussed the high level of retail allocations. She said it was unusual, and Gorman replied that more and more deals have large retail participation by citing the General Motors offering and others. The suggestion was that perhaps MS went to unsophisticated retail clients to increase distribution after institutional buyers balked for whatever reason. Gorman noted that this observation was unfounded.
Gorman went on to say that MS did its job well for its clients. FB got a good price, and MS balanced the supply and demand of shares while stabilizing the market when it was necessary. He suggested that the investment community should wait before evaluating the deal, as FB should do very well in months to come.
Once again, the issue of raising the offering price was discussed. Gorman made it clear that demand was high and significantly above expectations. The road shows, meetings with institutional investors, went well and demand increased. It was on this basis that the price was increased.
In conclusion, Gorman restated that MS and the other underwriters followed accepted procedures and rules. He said this journey is far from over. He does not expect that the U.S. Securites and Exchange Commission or regulators will criticize MS. And finally, MS will retain its leadership in the high tech equity business.
The reaction to the interview with some commentators was that Gorman handled himself well and answered questions professionally like a consultant; he was a senior person at a major consulting firm before coming to banking. One other issue is whether MS has made money from the declining price of FB stock. In its role as the stabilizing underwriter, MS may effectively be short stock, meaning it would profit if FB stock falls. Gorman did not respond to this issue in the interview and none of the commentators were prepared to push it any further.