New Details: How Facebook And Morgan Stanley Decided The IPO Price

Facebook CFO David Ebersmann

As Facebook Inc. and Morgan Stanley executives gathered on a call May 17 to arrange terms for the social-networking company’s initial public offering, they faced a trade-off: set the IPO price low and give up enough money to let investors profit from a day-one pop — or push the price high to help the company reap as much as possible from the sale.

On the conference call, joined by Morgan Stanley Chief Executive Officer James Gorman and Facebook Chief Financial Officer David Ebersman, the company and its lead bankers discussed an IPO price range of $36 to $41 a share, people with knowledge of the matter said. Ebersman’s aim was to maximise the company’s IPO proceeds and to cap the first-day increase at 10 per cent, said the people, who asked not to be identified because the talks were private.

Larry Yu, a spokesman for Menlo Park, California-based Facebook, declined to comment, as did Pen Pendleton, a spokesman for Morgan Stanley in New York.

JPMorgan Chase & Co. and Goldman Sachs Group Inc., which co-led the IPO, were also on the call, as were Michael Grimes, global co-head of Morgan Stanley’s technology investment banking group, and Dan Simkowitz, chairman of its global capital markets group, the people said. Absent was Facebook CEO Mark Zuckerberg.

JPMorgan bankers indicated that they had significant client demand at a price above $38, one person said. The group quickly reached consensus at $38 and discussions were not drawn out, the people said.

Gorman Oversight
Gorman joined the call to provide oversight, one of the people said. The involvement of an investment bank’s CEO in IPO pricing discussions is unusual, and it reflects the importance that Morgan Stanley ascribed to its role as lead underwriter on the largest-ever technology IPO. The New York-based bank stands to generate about $67 million in fees for its role as the first among 33 banks handling Facebook’s IPO.

Some investors and analysts later said the company misjudged demand and set the price too high, as evidenced by a 16 per cent decline in the share price through yesterday. Regulators raised concerns about the IPO and buyers of the stock have sued Facebook, underwriters and Nasdaq OMX Group Inc., the stock market on which the shares are listed.

Morgan Stanley may face regulatory review over claims an analyst shared negative news about Facebook with institutional investors before the IPO, Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, said this week.

Cut Forecasts
Morgan Stanley analysts reduced their 2012 Facebook profit projection to 48 cents a share from 51 cents days before boosting the price range on the IPO, according to people familiar with the matter, who asked not to be identified because the process is private.

William F. Galvin, Massachusetts’ secretary of the commonwealth, said separately that his securities division subpoenaed Morgan Stanley to learn more about talks between Scott Devitt, the research analyst, and the firm’s institutional investors about Facebook’s revenue.

Facebook increased the number of shares being sold in the IPO by 25 per cent last week to 421.2 million and raised its asking price to a range of $34 to $38 from $28 to $35.

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