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Facebook Fallout: Silicon Valley Won't Snub Morgan Stanley

Silicon Valley isn't quite ready to dump Morgan Stanley over the Facebook IPO fiasco.

It could be said that playing a role in botching the world's biggest tech initial public offering would be enough to kick its lead banker out of the club, or at least to the curb, but a tarnished image hasn't necessarily dented Morgan Stanley's position as a go-to underwriter for Silicon Valley, according to bankers, venture capitalists and start-ups.

The reasons run from the unusual size of the Facebook deal - a $16 billion offering - to blaming the Nasdaq, to the strong relationships Morgan Stanley's lead tech banker Michael Grimes and his team have crafted over the years with deep-pocketed venture capitalist firms and executives in the San Francisco Bay Area.

A week after the Facebook fallout, Morgan Stanley is - according to Silicon Valley sources - counting on these strengths to trump investor anger and lawsuits related to the move by its analyst to cut his forecasts for Facebook's revenue and earnings just days ahead of the IPO and then only tell the firm's major clients rather than publish those revisions widely.

"It's still going to be the rare occasion when somebody who has the chance to have them, leaves them out," said Scott Sandell, a venture capitalist at NEA, speaking about Morgan Stanley and its main rival in the Valley, Goldman Sachs.

Morgan Stanley was the No. 1 bookrunner for U.S. technology IPOs last year, advising on 16 of the 37 new issues, according to data from Thomson Reuters. So far this year, it has held on to that top spot.

There are at least half a dozen high-profile technology companies with pending IPOs that have already selected Morgan Stanley as a lead bookrunner, including Palo Alto Networks and ServiceNow. And those are not expected to be derailed, or delayed, said sources close to the matter. A spokesperson for Palo Alto Networks declined to comment. ServiceNow was not available for comment.

"I still think very highly of Morgan Stanley," said Jef Graham, a serial entrepreneur who is currently chief executive of RGB Networks, an online video-advertising company that could go public next year. He has worked with the bank on several merger and acquisition deals.

One reason: tech issuers know the big mutual funds and other institutional investors who will buy the largest chunks of their shares respect Morgan Stanley, in part because the bank is very selective about the issuers it represents.

"Goldman and Morgan Stanley on your (prospectus) cover recently - it's been a stamp of approval," said Tige Savage, a venture capitalist at Revolution LLC.


Leading tech investors said that while Morgan Stanley is being thrown under the bus for some of the unprecedented events surrounding Facebook's IPO, there is plenty of blame to go around.

"Morgan Stanley's services are a commodity and it is hard to blame them specifically because there are many people involved in the decision," said one of the investors, requesting anonymity because his firm has held discussions with management.

The bank on Thursday also pointed the finger at Nasdaq for not getting trade execution data from the exchange in a timely way on the initial day of trading.

And the final line of defense for Morgan Stanley that's now doing the rounds of the Valley: the Facebook IPO was a one-off - a giant offering in social media, a relatively untested sector that any bank could have mishandled.

"It's a problem with the IPO system, not Morgan Stanley specifically. If it was another bank they would have had similar problems," said a hedge fund manager who attended the Facebook IPO roadshow and closely followed other Morgan Stanley-run tech IPOs such as Zynga late last year.

"There may be some short-term decisions that go to other banks. But it's not like any other bank would have been less incompetent on the Facebook IPO," he added.

And amid a flurry of headlines this week about subpoenas and lawsuits against the firm, tech start-ups are keenly aware Morgan Stanley did succeed with Facebook by an important metric: making sure a company got the maximum amount of cash.

If things go wrong, entrepreneurs know the bank has the resources to step in and buy shares to support the stock, as Morgan Stanley did on Friday, Facebook's first day of trading and the only day it closed above its IPO price. Though the effort to keep the stock above $38 a share proved fleeting, the move will likely be a positive for future clients.

"You never know if the market is going to be hot or cold the day you price, and you need the bank to be there to support you," said Glenn Solomon, a partner at GGV Capital.


Morgan Stanley is still expected to face tougher scrutiny post-Facebook.

"What was perceived as the best of the best got the Facebook offering, and the general perception was it wasn't handled perfectly," said Revolution's Savage. "They have a question to answer now that they didn't have before."

Another way this ripples through the Valley, bankers said, is that companies could solicit advice more frequently and carefully from all their major underwriters, not just the bank in the prime position, known as 'lead left' - a term for the underwriter on the top left-hand side of the IPO prospectus.

"Having a real joint lead on an IPO - that's the counter argument that has emerged from this," said one investment banker from a rival firm.

But at this point, Silicon Valley is still expected to court Morgan Stanley.

"There's a little bit of a tarnish on the Morgan Stanley brand versus where they were a week ago. But is it going to prevent them from being picked? I don't think so," a second rival investment banker said. (Reporting by Sarah McBride and Alistair Barr in SAN FRANCISCO, and Nadia Damouni and Olivia Oran in NEW YORK; Editing by Edward Tobin and Ian Geoghegan)

Copyright 2010 by Reuters. All rights reserved.

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