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IPO VIEW - Morgan Stanley faces tricky Internet IPO pricings


By: Clare Baldwin | June 02, 2011

NEW YORK, June 3 (Reuters) - Morgan Stanley (MS.N) is the lead underwriter for Groupon's initial public offering, which could be good news for short-term investors and bad news for the online coupon company.

So far this year, the major tech company IPOs on which Morgan Stanley has been the lead underwriter have surged on their first day of trading, suggesting that the shares may have been priced too modestly.

LinkedIn Corp's (LNKD.N) shares more than doubled on their first day of trade last month. Shares of Russian search engine Yandex NV (YNDX.O) surged 55 percent and Renren Inc (RENN.N) -- sometimes called the Facebook of China -- rose nearly 30 percent in its debut. In all cases, Morgan Stanley was the lead underwriter.

Investors love logging fast, big gains on a stock, but the big first-day jumps also mean the company raised less money than it could have.

Shares of each of the companies listed above have fallen some since their debuts, but their first-day gains were far above average.

Bankers often say they try to price IPOs to rise about 15 percent on their first day of trade. So far this year, technology-related IPOs debuting in the United States have risen an average of 23.4 percent on their debut, according to data from Ipreo.


Groupon files for IPO of up to $750 mln [ID:nN02283211]

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Some argue that it is far worse for a stock to fall in its first day of trading than to surge. "One thing that these investment bankers and companies are nervous about is being seen as a failure, so they have more of an incentive to underprice rather than overprice," said Eric Jackson, at hedge fund Ironfire Capital, who did not see a major problem with the IPO pricings.

However, in January one CEO publicly disagreed. Using a Chinese microblogging site, E-Commerce China Dangdang Inc (DANG.N) CEO Li Guoqing lambasted Morgan Stanley for what he said was an underpriced deal. [ID:nN21261643]

It may be that there's no such thing as bad publicity, but banks prefer to avoid the kind of publicity that Morgan Stanley received from Dangdang. As Wall Street faces heightened scrutiny, this kind of first-day share jump could be all the more problematic.

Morgan Stanley and Groupon both declined comment.

"I think that the onus on underwriters is maybe stronger than it has been in a long time," said Bruce Foerster, president of South Beach Capital Markets and a former equity capital markets banker. "People are out there with high-powered scopes hunting for Wall Street," he added, noting there was still a lot of anger at Wall Street over the financial crisis.

In addition to Morgan Stanley, other banks with lead roles on Groupon, LinkedIn, Renren and Yandex are Deutsche Bank Securities (DBKGn.DE), Credit Suisse, Bank of America Merrill Lynch (BAC.N), JPMorgan (JPM.N) and Goldman Sachs.

To be sure, other, smaller tech IPOs not led by Morgan Stanley have also had outsized first-day pops -- but the marquee Internet IPOs so far this year are being led by Morgan Stanley.


Internet startups are notoriously difficult to price. There are few direct competitors to base an IPO valuation on, and the private-market valuations that do exist for social media companies -- a new phenomenon -- are based on just a handful of trades made by a small group of investors, which makes it hard to say whether they represent true demand in public markets.

"The valuations of some of these companies have increased very rapidly," said University of Florida finance professor Jay Ritter. "A couple of months ago people were talking about how the private-market valuations were too high. Then LinkedIn went public at a valuation of about three times where it was trading on the private markets ... the strength of public market demand surprised people."

On the morning of LinkedIn's debut, CEO Jeff Weiner took a stance opposite that of Dangdang's CEO, shrugging off worries that the IPO pricing underestimated the appetite for the stock. He told Reuters he wasn't even "thinking twice about where the price is today and leaving money on the table". [ID:nN1939946]

LinkedIn's IPO priced at the top of an increased range, something that Ritter said probably put off company concerns about price. LinkedIn's shares may also have had a bigger first-day pop because the IPO only accounted for about 8 percent of the company, and there may have been investors who wanted shares but didn't get them.


Groupon is spending large amounts of money to acquire customers and sign up merchants. In the first three months of the year its revenue totaled $644.7 million but it incurred a net loss in the period of $146.5 million.

There is no question that Groupon is growing extremely quickly, but at this point it is unclear how many of its new customers it will keep and there are no publicly traded companies that are perfect comparisons.

Trying to value Groupon will be a little like "blindfolded dart-throwing," said Espen Robak, President of Pluris Valuation Advisors.

Groupon CEO Andrew Mason said in a letter to potential stockholders that was attached to the company's IPO prospectus that the company does not value itself in conventional ways.

Given how volatile the markets have been, underwriters are taking a good deal of risk, of either overpricing IPO shares and seeing them subsequently tank, or underpricing them and seeing them surge in their early days of trading.

Furthermore, pricing that looks unreasonable early on may look more appropriate when markets rationalize. To that end, many investors, bankers and companies look beyond the first day of trading to measure the "success" of their IPO.

LinkedIn, Yandex and Renren have all fallen since their IPOs: LinkedIn, while still far above its $45 IPO price, closed on Friday at $77.92 -- 73 percent above its IPO price as opposed to its 109 percent rise on its first day.

Yandex shares closed at $33.50, 34 percent above their IPO price compared with their first day rise of 55 percent. Meanwhile, Renren is now trading below its IPO price.

The market is difficult, especially for the latest crop of Internet companies, said David Menlow, president of IPOfinancial.com. "The market is in a feeding frenzy," he said. "The underwriters can't win." (Reporting by Clare Baldwin; Editing by Gary Hill)