Fight for Facebook Shares May Be Messy

Fight for Facebook Shares May Be Messy

For Morgan Stanley, doling out IPO shares to clients was a discreet but formulaic business. But with the integration of Smith Barney and an iconoclastic Facebook founder calling the shots, this time may be different.

This week, Facebook filed paperwork for an IPO and announced that Morgan Stanley would act as lead underwriter. Facebook seeks to raise $10 billion in the deal, which could make it the biggest tech IPO since Google. And Morgan Stanley clients, who may be poised to get in on the action, are drooling with anticipation.

One Morgan advisor in Florida said he’s getting calls from clients who have never before shown interest in tech stocks or syndicates. Many of the clients asking for shares don’t even have Facebook accounts. One, a former teacher, is such a luddite that, until a couple of weeks ago, she didn’t have an email address. Her son had to set up an account for her, the advisor says, because clients must agree to receive syndicate documents through their email accounts on the legacy Smith Barney side of the firm.

“I’ve never had a time where so many random clients are all calling in and asking for shares,” said the Florida advisor. “The amount of interest is enormous. Winning it is an enormous double-edged sword. Now that we’re the lead underwriter, we could actually start losing accounts, because if clients don’t get any they may leave. All clients should get a little bit so everybody is upset but not miserable,” he says.

Morgan Stanley financial advisors can’t promise their clients anything yet, however. They have no idea how many shares they might get to give away and to whom they can give them. Management has not yet said anything about how much of the IPO will go to retail versus institutional clients.

How the timing of the IPO—some predict it will go this spring—matches with the completed integration of the Morgan Stanley and Smith Barney platforms, will play a big role in determining how shares are divvied up.

That’s because the two sides of the firm have very different ways of allocating syndicate. Morgan traditionally allocates to its best advisors, who can then choose which clients get shares. Smith Barney allocates to its best clients based on a complicated formula involving how much syndicate they’ve bought in the past, among other things. The integration of the two platforms is supposed to be complete by the summer, but there have already been delays, so it’s hard to know for sure whether that timeline will stick. When it does happen, Smith Barney is supposed to switch to the Morgan Stanley method, financial advisors say.

One legacy Smith Barney advisor is looking forward to the switch because it will give him more flexibility, he says. “Let’s say you had a client who was extremely instrumental in introducing you to high-net-worth people. In the past you might have felt bad they weren’t big enough to get [syndicate] but they were responsible for helping you get new business. Now you will be able to allocate to these clients.” It also eliminates a game that was played in the past, he says, where clients would try to raise their numbers so they would have access to the best IPO deals. To do this, they would always buy syndicate but flip the ones they weren’t crazy about soon after, he says.

Some analysts say Morgan Stanley won the lead role on the Facebook IPO precisely because it has such a great retail distribution channel for IPO shares. Morgan Stanley CFO Ruth Porat said of the firm’s underwriting business, “the benefit is not just within banking, but clearly goes through the secondary trading [and] through to Morgan Stanley Smith Barney,” on a 2011 conference call.

Ben Holmes, IPO analyst with, predicts the Facebook IPO won’t run until the second or even fourth quarters. “They don’t have time to bring it in the first quarter,” said Holmes. “They could bring it in the second quarter, but not the third quarter. No one wants to bring it in the summer months. It’s very volatile, hard to get people to get to work in the summer. And fourth quarter is the Christmas quarter. It’s bonus time, when all these guys bring their most exciting deals. Google came in the fourth quarter.”

But John Fitzgibbon, founder of, said when it goes is anybody’s guess. “They have a long way to go,” he said. “They’ll probably go through a couple more filings, put the numbers up. Then about two weeks after that announcement, they’ll price it.”

Fitzgibbon thinks retail investors may have more access than usual to this particular deal. “You have someone in control of the company who is very sensitive to the individual investor,” he said. So maybe the deal will not go all institutional. “With Zuckerburg’s outlook, the whole operation is based on the individual. He’s going to have a lot of say-so. I’m sure an awful lots been said behind closed doors. Possibly, the individual investor will get better treatment in this deal.”

Morgan Stanley Smith Barney declined to comment on how shares would be allocated. A source at the firm said only that “there are a lot of factors, overall size and nature of book, quality of relationships, and consistency in new issue participation.”

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