Facebook Picks Morgan Stanley to Lead IPO

By Douglas MacMillan, Lee Spears and Serena Saitto - Feb 1, 2012 12:01 PM GMT+0700

Facebook Inc., the world’s largest social-networking service, chose Morgan Stanley to take the lead on its planned initial public offering, four people with knowledge of the matter said.

Facebook will file plans with regulators today to raise $5 billion, though the amount may increase, two people said. Morgan Stanley stands to earn a larger share of the fees collected by securities firms for arranging the IPO. Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM), Barclays Plc (BARC) and Bank of America Corp. will help with the sale, said the people, who asked not to be identified because the matter is private.

Getting picked for the IPO is a coup for Morgan Stanley and Michael Grimes, the global co-head of the bank’s technology investment banking unit. The securities firm won the biggest share of business underwriting U.S. initial offers by Internet companies last year, data compiled by Bloomberg show. Taking the lead on Facebook may catapult the New York-based bank to the top of the U.S. IPO league table for a third year running.

“This means a huge windfall for them,” said Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank. “The fact that they have led so many high-profile social media deals in the last year is proof positive that Morgan Stanley (MS) is most likely to be able to get this deal done.”

Bankers’ Fees

Investment banks working on behalf of Facebook may generate as much as $500 million in fees, depending on the company’s ultimate valuation, Ablin said.

Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment, as did representatives of Morgan Stanley, Goldman Sachs, JPMorgan, Bank of America and Barclays Capital, the investment banking division of Barclays.

Facebook had been discussing raising as much as $10 billion, a person with knowledge of the matter said late last year. At that size, Facebook’s IPO would be the biggest ever by an Internet or technology company, data compiled by Bloomberg show, trumping the combined U.S. and German debut from Infineon Technologies AG (IFX) totaling about $5.85 billion in 2000.

Silicon Valley relationships may have paid off for Morgan Stanley after it took the lead on last year’s biggest Internet IPOs, from companies such as Zynga Inc. and Groupon Inc. (GRPN)

“Morgan Stanley was able to leverage its dominance among Internet companies going public,” said Anupam Palit, head of research at GreenCrest Capital Management LLC.

League Table Leader

On underwriting league tables, Morgan Stanley took 20 percent market share for IPOs by Internet companies on U.S. exchanges in 2011, according to data compiled by Bloomberg. New York-based Morgan Stanley also led all U.S. IPOs last year with 13 percent share, selling an estimated $4.6 billion of shares and generating an estimated $262 million in fees, the data show.

Grimes, a Los Angeles native who graduated from the University of California at Berkeley, meets regularly with investors in search of promising startups, has close ties to venture capitalists at such firms as Sequoia Capital and is an early adopter of his clients’ products.

A banker with Morgan Stanley since 1995, Grimes also may have benefited from longstanding ties to Facebook Chief Operating Officer Sheryl Sandberg, who was a senior executive at Google at the time of its IPO. Morgan Stanley led that deal.

Morgan Stanley usually allocates a portion of initial offerings for clients of its retail brokerage, Morgan Stanley Smith Barney, a joint venture with Citigroup Inc.

Gorman’s Goal

Morgan Stanley Chief Executive Officer James Gorman has said that new equity issuances provide investment banking revenue to the brokerage and drive higher trading activity.

That may help the brokerage, the world’s largest, with more than 17,000 advisers and $1.65 trillion in client assets, make strides toward Gorman’s goal of a 20 percent pretax profit margin. The unit had a 10 percent margin in 2011. Morgan Stanley owns 51 percent of the joint venture and has the chance to increase that stake to 65 percent starting in May.

Morgan Stanley also worked on IPOs by Yandex NV, Zynga and LinkedIn Corp. (LNKD), among the biggest Internet debuts in the U.S. last year. It was one of the lead managers on Google’s IPO in 2004 and led Apple Inc.’s IPO in 1980. Goldman Sachs, which placed fourth in U.S. Internet IPOs in 2011 behind Deutsche Bank AG and Bank of America, helped take Yandex, Zynga and Groupon public, while losing out on LinkedIn, the data show.

Goldman Sachs-Facebook ‘Strain’

Goldman Sachs’s 2010 investment in Facebook alongside Digital Sky Technologies didn’t go off without a hitch. The bank halted an offering of the shares to U.S. investors, it said in a January 2011 statement, on concern that “intense media attention” toward the deal could violate U.S. rules limiting the marketing of private securities. Goldman Sachs instead restricted the offering to non-U.S. clients.

“It would seem that the Goldman Sachs-Facebook relationship was strained as a result of that deal,” Ablin said.

Morgan Stanley, for its part, was lead-left in 2011 on U.S. Internet IPOs from companies including Zynga, Groupon and Pandora Media Inc. (P) that handed declines to some investors. Zynga dropped as much as 20 percent after its $1 billion IPO before rising back above the offer price. Groupon slid as much as 24 percent before recouping losses. Pandora’s stock declined as much as 39 percent. The doubling of LinkedIn’s shares on their debut raised concern that Morgan Stanley and the IPO’s other banks could have set a higher initial price.

The average fee on the IPOs of Yandex, Zynga, Renren Inc. (RENN) and Groupon, the four Internet companies that each raised more than $500 million in U.S. initial offerings last year, was 5.1 percent, data compiled by Bloomberg show. At that percentage, a $10 billion Facebook IPO would generate fees of as much as $510 million for its underwriters.

Morgan Stanley’s assignment was initially reported by IFR.

To contact the reporters on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net.

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net