Bats IPO Reversal May Cost Morgan Stanley, Banks $7.1 Million

Morgan Stanley and banks on Bats Global Markets Inc.’s (BATS) initial public offering may lose $7.1 million in fees after the exchange operator withdrew its IPO, felled by a system crash that hurt Apple Inc. (AAPL) and its own stock.

Fees earned would have been nullified by the cancellation of the offering, said Craig Arcella, a partner at Cravath Swaine & Moore LLP focused on capital markets. Morgan Stanley, Citigroup Inc. (C), Credit Suisse Group AG (CSGN) and other banks would have divided up $1.12 a share for the IPO, according to data compiled by Bloomberg.

“It is a pretty big deal for a company to cancel an IPO once it has priced,” said Arcella, whose clients have included International Business Machines Corp. and State Street Corp. “Usually when something bad happens between pricing and closing, there are ways to disclose your way through it and re- confirm orders.”

Bats joins a handful of other companies that have retracted IPOs post-pricing. Wilt Chamberlain’s Restaurants Inc., owned by the former basketball star, withdrew a $9.8 million IPO in 1993 after the shares fell one-third from the offering price. Normandy America Inc., a reinsurance company that tried to replicate billionaire Warren Buffett’s investment strategy, withdrew a $180 million IPO in 1995, two days after it priced.

Citigroup, Deutsche Bank AG, Credit Suisse, Getco LLC and Lehman Brothers Holdings Inc. are among owners of Bats. Almost half of the shares offered were to come from the estate of Lehman Brothers, with another 1.1 million from Getco, according to the prospectus Bats filed with the SEC. Lehman offered 3.03 million of its 3.98 million Class A shares.

Apple Sank

Data received by Bloomberg around 11 a.m. yesterday in New York showed Bats stock, the first ever listed on its Lenexa, Kansas-based market, quoted at pennies after being priced at $16 on March 22. Close to the same time, a transaction in Apple shares was executed on Bats that was so far from the market price that it led to a halt.

Before that trade, the exchange had sent around a notice saying that it was investigating “system issues” that affected companies with ticker symbols from A to BF. Cupertino, California-based Apple’s ticker is AAPL, while Bats’s was to be BATS.

“Although our affected market has reopened, in the wake of today’s technical issues, which affected the trading of certain stocks, including that of Bats, we believe withdrawing the IPO is the appropriate action,” said Chief Executive Officer Joe Ratterman.

Bats spokesman Randy Williams didn’t immediately respond to a phone message and e-mail seeking comment. Representatives at Morgan Stanley (MS), Citigroup and Credit Suisse declined to comment.

Typical Process

IPOs usually close three business days after the first trading day, after which sales of the stock are final, Arcella said. Closing dates are sometimes as much as five or 10 days after the pricing, he said. Bats’s IPO was scheduled to close on March 28, the company said in a statement yesterday.

Bats had sold 6.3 million shares on behalf of existing stockholders, according to a statement March 22. The exchange had initially offered the stock for $16 to $18. The underwriters could still get some compensation, depending on the terms of their contract, said Michael Schwamm, a lawyer with Duane Morris LLP in New York.

“They’ll get reimbursed for expenses and perhaps some type of fee if they can sort of trace it back to a breach of the company with obligations under the agreement,” Schwamm said. However, that “is slightly different from what happened here. They pulled it because of the glitch in the system -- I would assume that they’ll go back to market with this once the dust settles.”

To contact the reporters on this story: Lee Spears in New York at lspears3@bloomberg.net; Anjelica Tan in New York at atan224@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Nick Baker at nbaker7@bloomberg.net

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