Here is a detail from the Wall Street Journal’s article today about how Morgan Stanley tech banker Michael Grimes excluded the other underwriters from having much of an active role in managing and pricing the Facebook IPO and I cannot stand how good it is:
A page of his pitch book to other companies,* which he calls the “Driver/Navigator Model,” shows a black sports car. A company about to go public, the pitch reads, must choose between a “single driver [who] operates the steering wheel, gas, brake and clutch,” or the “two driver model, where the car literally has an extra steering wheel, gas, brake pedals and clutch for a second driver.” Morgan Stanley, the pitch says, “favors the sole bookrunner approach.”
Imagine being persuaded by that! You could construct a hierarchy of pitchbook pages based on how persuasive they’d be to a rational person; I’m the sort of person who tends to find tables of numbers most compelling, followed by charts (I know, I know), followed by functional diagrams of functional things (“we put the mortgages in this green box, and then sell them to this red box”), followed I guess by pages of texty bullet points, followed last of all by METAPHORICAL CLIP ART.**
Not, really, to single out Morgan Stanley here. The metaphor is stupid, and not rendered less stupid by the inclusion of “literally” (putting two literal steering wheels on one metaphorical car must make navigation especially difficult), but the thought is a commonplace among investment bankers – and hotly contested, as you can tell by the griping from competitors that must have led to this article. On the one hand, having a single bank coordinating the sale process and talking to investors does help an issuer stay on message. Particularly where, as in Facebook, the company made several aggressive moves in upsizing and repricing the deal, any dissent from the co-bookrunners suggesting that the book was not as strong as Morgan Stanley was implying could have led to pushback from investors. The clarity of message that comes from one underwriter controlling communication probably did help the deal get done aggressively.
On the other hand, more active underwriters might mean more ability to leverage investor relationships to improve price, and more viewpoints for the company to consider. And here the co-bookrunners were of course right: demand just wasn’t as strong as Morgan Stanley thought. Also if you read this article you do not exactly get the sense that they were quiet about it until now, when they woke up and decided to speak to the Journal. Excluding them from meetings and decisionmaking can’t prevent the co-bookrunners from straying off message in talking to investors – perhaps the reverse. I’m not sure this article does Goldman and JPMorgan as many favors as they think it does. If I were Morgan Stanley I’d be telling issuers to kick those banks off the next deal as whiny underminers.
Unless I were pushing to get on a deal that they were already running. If you are in the driver’s seat – sorry! – going in to the IPO process, which it seems like Morgan Stanley was for Facebook, it is an iron law that you will pitch to be the sole active bookrunner. If you are not, then of course you advocate a multi-handed approach. Every bank is sometimes in one position and sometimes in the other, and you can be certain that Michael Grimes has another pitchbook page for when he’s not likely to be the lead left bookrunner, in which he explains the benefits of cooperation and multiple perspectives. What is the metaphorical vehicle? I’m picturing those creepy multiple-person circular bicycles. Please let Morgan Stanley have a pitchbook page with one of those.
Taking both sides of this debate is made easier by the fact that good statistics are hard to come by: not only are there many ways to measure IPO success, but more importantly, there’s no great way to measure whether deals are run by one or many underwriters. Facebook seems to have been firmly in the hands of Morgan Stanley, but listed three bookrunners on its cover and in league tables.*** If you go run a report on deals with multiple versus single bookrunners, the Facebook … debacle-ish … will show up as a multi-handed deal despite Morgan Stanley’s tight control. Obscuring the facts that way makes the question un-susceptible to my favorite kind of pitchbook pages – hard facts with a right and wrong answer – and thus allows everyone to pitch what they want. Bankers – bankers, mind you – are rewarded for what they are good at (pitching) rather than what is mostly out of their control (an IPO that prices and trades well).
You might ask why companies would put up with this system – why would Facebook pay JPMorgan and Goldman $35mm and $26mm, respectively, for doing nothing? The answer is usually some sort of loose quid pro quo: they’re being rewarded for lending money to Facebook, or for doing its earlier private financing, rather than for the actual work they do on the IPO. They’re also of course being paid to take the risk of liability for underwriting the deal, which is not just theoretical.
But my question is – why would the banks want to be on the left, running the show? Yes, leading a big IPO makes you more likely to get the next one, and the issuer’s additional capital markets and M&A business – if the deal goes well. And it makes you look good to your investor clients – again, if the deal goes well. It makes those things less likely, though, if the deal goes poorly. Being a passive bookrunner, as JPMorgan and Goldman effectively were, gives you league table credit, allows bragging rights if the deal is good (and some distance if it’s bad), and most importantly, lets you make tens of millions of dollars for no work.**** That always seemed like an awesome deal to me, which is perhaps why I was not as good a banker as Michael Grimes.
* So, unclear if he actually showed it to Facebook. Perhaps for a pitch that big he brought an actual black sports car, maybe with two steering wheels so he could demonstrate the unwieldiness. Show, don’t tell. “Mark, let’s take this car around the block so you can get a really good sense of why it would be a bad idea to drive an IPO this way.”
** Sort of a propos of nothing but in my old job I maintained a folder of Worst Pitchbook Pages; there is much to choose from and Grimes’s Knight Rider fantasy would have comfortably missed the cut. Not to give away inside information but I will share one marvel with you, which is that there was a page with a chart whose axis labels I forget but it looked like this:
That is how you visualize quantitative information. I’m sure it made sense at the time.
*** Incidentally one useful indicator is the naming of the “representative” or “representatives” for the underwriters at the beginning of the Underwriting section of the prospectus. The representative(s) usually run(s) the show, and in Facebook, in fact, MS was the sole representative. This is more a rule of thumb than a certainty though.
**** Other than pitchbook production, of course. Not to be underestimated.