Syndicate: If You Can Get It, Run The Other Way

Given the insane hype surrounding the Facebook IPO, it should really have come as no surprise to anyone that it’s being perceived as a massive flop. (A search at the NY Times website turns up no articles about Cisco Systems 1990 Initial Public Offering (Feb 16, 1990 at a split-adjusted price of $0.06); it does turn up a story that references Cisco’s Restaurant, Bakery and Bar in Austin, TX). In fact, it has been widely reported that the underwriters had to step in to prevent the stock from falling below its $38 issue price, which would have truly been an unmitigated disaster. While investors stood to make a bit of money from the Facebook IPO (if they timed their sale right), it clearly did not live up to the breathless media coverage of the last several weeks. It was all too reminiscent of the “Countdown to PALM” we were treated to a dozen years ago on CNBC (who remembers that?). And while the contrarian in me wants desperately to get long FB when I see “Experts Say Now’s Not the Time to Buy Facebook,” my gut tends to agree.

The wildcard in the FB offering, to me, was the fact that no one could quantify the brand name recognition and what its potential impact would be on investors’ appetites. With [fill in the blank] hundreds of millions of “users” (however you choose to define them), how many of them would want in? (20/20 hindsight answer: Apparently not enough.)

In the end, the age-old Wall St. adage proved true yet again: Retail investors should be circumspect (to put it politely) of any offering they’re able to get their hands on. If you can get it, chances are you don’t want it.

How does the syndicate process generally work on the retail side? Herewith, a primer.

Every office has a designated syndicate coordinator whose job it is to work as a liaison with the syndicate desk that handles the allocations to the branch offices. Once upon a time it was the coordinator’s job to poll his advisor colleagues for their interest (Indications of Interest, or IOIs, in street jargon) in each deal on the calendar and subsequently “indicate” for X shares of stock from the desk. Back in the day, the institutional/retail split was fairly equitable, and the coordinator could, with some exceptions, be fairly confident that he’d get the number of shares from the desk for which he’d indicated. The system worked for everyone.

Over the years, notably throughout the internet/technology bubble, Day One “pops” – huge gains from the issue price – became fairly common place, producing outsized profits for IPO recipients. Consequently, firms began to use IPO shares as carrots to their institutional accounts (to do additional business) and the institutional/retail split became absurdly lopsided in favor of the institutional side. Except, of course, when it came to REITS or companies that arguably should not have been going public in the first place (read: dogs that would open flat, trade down from there and never recover) – there was, is, and always will be plenty of those for the retail side of the house.

Although coordinators generally did a fair and equitable job of handing out the allocations they got from the desk, some squeaky wheels (every business has more than its share), decided they weren’t getting their due, or that coordinators were playing favorites to the whiners’ detriment, or that there was no clearly defined process (there wasn’t, really) or some such. Complaints and perhaps a lawsuit or two ensued, and a process was established for syndicate participation. But that’s another (fascinating) story.

Eventually, as the balance between institutional and retail allocations became more and more lopsided, the coordinator’s aggregate IOI to the desk became largely symbolic, as there became no chance retail would be handed enough stock to satisfy demand in even a lukewarm deal. I’ve heard of innumerable offerings where large retail offices (100+ advisors) get allocations of 500 or 1,000 shares total to divvy up among all those advisors. The notion of going to a high or ultra-high net worth client with 50 shares of a deal priced at $30 – a $1,500 principal investment – is beyond laughable. But that became the norm. Like Mom used to say at mealtime: “You have two choices for dinner: take it or leave it.”

Fast forward to Facebook. For weeks, perhaps months, every communique from syndicate desks street-wide cautioned retail offices that allocations would be very small and that clients’ expectations needed to be managed – standard language for any deal that has a decent chance for an opening day pop. It’s situations like those that are the syndicate coordinator’s worst nightmare – not nearly enough stock and way too many mouths to feed. This was the case right through last Thursday, when allocations were expected to go out to the offices.

And then came the stock. A flood of it. More than anyone, anywhere, expected. Advisors who’d indicated for stock got more than they’d asked for. Those who didn’t even indicate – or didn’t rank highly enough on the process-driven totem pole to get stock – suddenly found themselves awash in stock they never expected to get, and that they had told clients to forget about. The unconfirmed word was that FB had instructed its underwriters to broaden retail participation (but even that would not account for what was unleashed on retail).

And then the fun began. Given all the regulatory changes of the past few years, clients now need to certify their eligibility to participate in the IPO market. Yes, really, they do. A copy of the form they need to sign and submit can be found here. Well, guess what? Since retail syndicate has more or less become a running joke, no one had these forms on file. Hilarity ensued, as brokers emailed these forms to clients, who signed them and got them back (via fax or scan/email). They then had to be signed off on at both a local level and in document control, which was quickly overwhelmed to the point of multi-hour delays in processing. To all participants’ great credit, however, I hear any and all available resources were thrown at the problem and that, in the end, no one who wanted to participate was unable to do so.

In the end, no harm no foul, I suppose. Morgan Stanley and the syndicate stepped in to support the stock at $38, so no one who’d gotten IPO shares has (yet) taken a loss. Anyone who did not participate in the IPO had the opportunity, late in the day, to buy all they wanted at the IPO price. Who really comes out of this looking the worst, in my very humble opinion, is the media, which just can’t help itself these days. If it had not been all Facebook, all the time, 24/7, for the past month, perhaps this would not now be viewed as such a huge disappointment which, truth be told, it’s not. A new, different type of company (i.e. “social media”) went public – just like CSCO did in 1990. It is, as Zuckerberg said, a milestone, but by no means an end in and of itself. Absent the record-setting hype that surrounded this deal, things worked more or less the way they’re supposed to. It was the ridiculous doubles and triples of the late 90s early 2000s that were the anomalies.




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