Morgan Stanley Did Right by Facebook

TheStreet.com

NEW YORK (TheStreet) -- Henry Blodget sort of beat me to this but let's have a few kind words for Morgan Stanley anyway.

It didn't screw up the Facebook initial public offering. It did great by Facebook management.

Let me start with a story about my late friend Rufus, who owned a rental house on my block 15 years ago.

Rufus had owned the house for years, and got a nice income from it. But he was aging and thought he could get a good price. An offer came in, for $40,000, and he sold.

A month later, that buyer flipped the house for $80,000. A few months later, after some superficial renovation, it sold again -- for $160,000.

You think old Rufus was happy with the broker who told him to take the $40,000? I don't. What the broker knew, what he didn't tell Rufus, was the Atlanta "color line" had just moved a few miles south. Somehow, after the Olympics, the real estate industry sort of got together and decided that, gee, my block was just two miles from Emory University and was now golden. The house hadn't moved. There was just some new information in the market the broker didn't tell this seller.


Now, if Morgan Stanley had been handling Rufus' house, it might have gotten the full $160,000. It might have gotten $200,000, and that seller might have had to wait years for a gain. (The house is now worth well over $200,000, by the way.)

That's basically what Facebook got from Morgan Stanley. It got a full price for the shares it was selling. It got $10 billion in cash with which to build the business.

I'm supposed to think this is a bad thing.

Google did something like this when it went public in 2004. HowStuffWorks has a nice explanation of the "Dutch auction" process the company used to try and maximize its value and give everyone a shot at some shares.

Google stated how many shares it would offer, then took electronic bids. (Morgan Stanley was one of the underwriters.) The result was a sale at $85/share. Google is now over $900.

Now, Google did make some mistakes. It talked during its quiet period. It didn't register all the shares given to employees before the IPO. It hoped to get up to $135/share. It got less.

Morgan Stanley learned its lesson. It hyped the Facebook IPO to the skies. It pounded the table for the maximum price on the shares being sold. It got that maximum price and the stock hasn't been that high since.


What the speculators wanted was to get in cheap and get a "pop" on the stock on the day of the offering, for a quick profit. This is what all those cool Internet stocks did when Hambrecht & Quist was taking them public in the 1990s. H&Q itself sold out at the peak of the Internet bubble to JPMorgan Chase , for $1.35 billion, Wikipedia recalls. Founder Bill Hambrecht went on to patent a Dutch auction method called OpenIPO.

I really wish Bill Hambrecht had sold my friend Rufus' house back in the day. Or that Morgan Stanley had. So some speculators got fleeced on Facebook. Big deal.

I'll just call it Rufus' revenge.

At the time of publication, the author was long GOOG.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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