Morgan Stanley Chairman and Chief Executive Officer James Gorman appeared on CNBC’s “Closing Bell with Maria Bartiromo” Thursday afternoon, reiterating that his company did nothing improper in the run-up to Facebook’s initial public offering and urging patience with the social network’s slumping stock, saying, “The story isn’t over. Again, we are at day eight here. Give this a little bit of time.”
The IPO launched May 18 at $38 per share, and Facebook stock closed trading Thursday at $29.60.
Bartiromo read Gorman a quote from The Cohen Group CEO Peter Cohen:
Frankly, it was an overreach. I don’t think that it should have been upsized, and I think that we don’t really know all of the facts about it, so it’s not fair for me to talk about it, but I’ve never, in 43 years, seen anything bollocks up like this in my career.
I think it is interesting that if we played the tape about what everybody was saying the week before the deal: Would it be priced at $50? There was pricing on an exchange in Germany apparently that morning of $70 for a brief period. The secondary market had this trading at higher numbers at different points. There were a lot of opinions the week before, and lot of opinions, including Peter Cohen’s, after. It is very different, though, actually being in the room and understanding what the demand was at that point in time. Now, operating as an underwriter, you’re matching both the seller’s desire to get a fair price for the company they have built, and the risk that they undertook with, obviously, the demand in the marketplace, and that was the process we went through.
Gorman on why the price of Facebook stock slipped:
I think this is a very complicated story. By the way, we’re on day seven or eight of the story, and I think the stock was up 10 percent from the lows just today. This is one of the most volatile openings to an IPO ever, and it also happens to be one of the largest ever, and also happens to be one that affects an institution that is touching 900 million individuals around the world. So it’s got hype going in every single direction. We spent the time, all of the underwriters, putting together and trying to find the right pricing integrity, obviously working with institutional shareholders and retail shareholders, establishing a pricing range, and it was ultimately priced at the top of — not above, but at the top of — the revised range of $38.
Well, we thought we were opening with the market, shortly after the market was opening, and it was clear that the exchange handling the issue, Nasdaq, was having problems. We were being updated every couple of minutes and delayed every few minutes, and eventually, they declared a go, everybody could go, and we could start proceeding with the transaction. Over the next couple of hours, there reined enormous confusion and disarray, because buyers and sellers didn’t know what they were being filled at. Some people who thought they were long were short. Some people who thought they had sold at $42 had sold at $41. Some buyers who thought they bought at $38 were buying at $40. That confusion, frankly, in a deal of almost unprecedented size, against a macro backdrop of everything going on in Greece, and so on, created a sort of potent elixir, if you will, that really set this thing aflame.
His message to buyers who are disappointed with the stock’s performance so far:
But the story isn’t over. Again, we are at day eight here. Give this a little bit of time. Day one, the stock opened above $42, and the average weight of price for the first day was 5 percent improvement. We just have to be a little patient. There was more hype going into this, I thought, than any security ever traded. However, the hype in the past few days has exceeded that. We just all need to settle down a bit, find the right base, and get back to the fundamentals of what is this great company doing and capable of doing with its 900 million active users that they have out there, and give this a little bit of time. Let’s have this discussion again in 12 months.
On reports that the IPO’s underwriters made about $100 million for their efforts to stabilize the scuffling stock:
Our intent is not to make money on the greenshoe. Our obligation as a stabilizing agent is to be the stabilizer of the security, and obviously, the shoe helps you perform that function. We are not done yet. We are still in a process and, as I said, this process is going to unfold over weeks, and eventually, all of this information will be disclosed. Our intent is to support our client, to provide a ready market matching buyers and sellers. And all of the underwriters, key to this syndicate, in addition to the company, agree that the pricing is appropriate give the demand and supply.
On why the number of Facebook shares being offered was increased:
Well, it’s not terribly unusual to raise the number of shares. You go out with an expectation that there is a demand for a certain number of shares, a belief, but you don’t really know. And then you go and do the work — and that’s what the roadshow does — and it either excites or diminishes demand. In this particular case, it was apparent early into the roadshow that the demand was significantly beyond what people thought it might be, and that’s why it was raised. The same thing happened, by the way, with General Motors, and I believe we increased the total shares that went up 20 percent or 21 percent with GM, almost identical.
On the allegations about Morgan Stanley lowering its revenue estimates for Facebook just prior to the IPO, and who was told:
Just so everyone understands what the process is, after you receive an S-1, if there is a change in what the performance of the company is believed to be — and Facebook, I think, acting with great integrity, alerted the marketplace relating to mobile advertising, what the numbers, what the direction was, trajectory for the second quarter over the first quarter — we put out an amendment to the S-1, and that went to every investor. Based upon that and based upon the company making that alert, I saw and I’ve got a list of over 20 news organizations that reported that — which included, by the way, CNBC — that came out and said there was a revision that was frankly a modest revision to the projections for Facebook, which translated into an amendment and said, “Dear investors, we know you are interested in the stock, here’s the amendment. Everybody make up your mind.” And the policy that we and the underwriters operated under — and this has been looked at a number of times over the years by regulators and, I believe, the Securities and Exchange Commission — is that there is individual disclosure, oral disclosure, no written reports to institutional investors interested in what that particular analyst says, because they can go to many of the companies and pick up input from a number of the different underwriters. The policy to date has been to not offer that same information — either the original projection or the revised — to retail investors. All of this was during the period of the roadshow. It wasn’t after the transaction went public. And the demand was still there at that point, when we got to the end of the roadshow. Listen, there will be various inquiries, and I know the SEC and Congress have looked at that. I’ve said to my organization that there was no nefarious activity, and that this was standard operating procedure. It’s the policy we and all of the other underwriters have operated under with retail organizations, and there wasn’t any desire to obfuscate or hide. This was standard operating procedure, and it was in the public domain.
Readers: How do you think the investigations by the Financial Industry Regulatory Authority and the SEC will play out?