As Morgan Stanley’s retail force is learning, it’s hard being the anointed one. To most of the world, Morgan Stanley got the plum job of lead manager for the most important public stock offering since Google in 2004. But among the retail sales force at the firm, the Facebook Blessing might as well be known as the Facebook Curse.
The refrain from Morgan Stanley’s rank and file: The IPO of the decade is a lose-lose proposition. That’s because retail investors as well as smaller institutions are likely to be disappointed with their Facebook allotment. Institutional players know how things roll, but for the retail brokerage force, the situation is particularly vexing. Many clients assume that because it is a lead underwriter, Morgan Stanley brokers are on the inside track. That’s true, but means less on a popular IPO like Facebook’s. Financial advisers in the lead group, which also includes Goldman Sachs and JPMorgan, do have an edge over the 30 other investment banks tasked with distributing shares. But it’s not much of an advantage. Global demand for the $11 billion in shares appears to be much bigger than the deal itself. Institutional salespeople at Morgan Stanley are already warning clients that they expect the deal to be 20 times oversubscribed, one source explained to me.
It’s always been the case that only a thin sliver of retail investors would be able to get hot IPO shares. They were typically high-net-worth clients who reliably invest in every single IPO that would come their way – hot or not. Shakier deals, of course, were always available to retail clients. In its heyday, Lehman Brothers brokers used to say that some of the mediocre IPOs they pushed were from the “institutional waste basket.”
Over time, retail investors have been even less likely to win any meaningful amounts of shares in hot IPOs. That’s in part because fewer companies are going public. Meanwhile, institutional investors have grown bigger and bigger – which means that they need a bigger slice of a new issue if it is to have any impact on portfolio performance. The most recent super-hot, social-media IPO, LinkedIn, went to a remarkably few number of institutions, my sources tell me.
These facts don’t do much for morale at Morgan Stanley, which announced earlier this year that advisers who have produced less than $500,000 per year in gross commissions would not get any shares in IPOs – that is, they don’t get to share in the syndicate for Facebook. That was just before Facebook announced its plans to go public. Talk about timing. Morgan Stanley’s joint venture with Smith Barney has not been the smoothest; adviser count has dropped 5 percent in the past year; this year alone, the firm lost at least 87 advisers who managed about $7.2 billion in assets. The Facebook deal is adding oil to that simmering fire. One broker at another wirehouse told me disaffected Morgan Stanley clients have announced that they will move their accounts to him if they don’t get any Facebook shares.