Morgan Stanley Faces ServiceNow IPO Test After Facebook

Morgan Stanley Faces Test on ServiceNow IPO After Facebook Flop
Morgan Stanley is the No. 1 underwriter of global IPOs and is on track to lead the most initial offerings by Internet and technology companies this year, according to data compiled by Bloomberg. Photographer: Scott Eells/Bloomberg

Morgan Stanley is taking ServiceNow Inc. public this week in the first U.S. technology initial public offering since Facebook Inc., a sale that may be crucial in preserving its position as Silicon Valley’s go-to bank.

Morgan Stanley has been under fire for how it led the $16 billion Facebook sale after the shares plunged as much as 32 percent since their debut last month. That’s put the New York-based firm under more pressure than usual to balance ServiceNow’s expectations with those of investors when it prices the IPO of the cloud-based software maker on June 28.

“Everybody is going to be watching this IPO, and Morgan Stanley’s reputation is on the line,” said Keith Wirtz, who oversees $15 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. “If the price is too low, the company is underserved; if the price is too high, like Facebook, investors will be frustrated.”

Morgan Stanley’s dominance in the IPO market is at stake. The firm is the No. 1 underwriter of global IPOs and is on track to lead the most initial offerings by Internet and technology companies this year, according to data compiled by Bloomberg. The outcome of ServiceNow’s IPO is also likely to influence plans to go public by other technology companies such as Palo Alto Networks Inc. and Kayak Software Corp. and may help revive the broader IPO market.

Lower Multiple

ServiceNow and its founder are offering the stock for $15 to $17 a share. The company attracted more than enough demand for all the shares being sold in the offering, a person with knowledge of the matter said today. The person, who asked not to be identified as the terms aren’t final, declined to say by how much the offering is oversubscribed.

The midpoint of the price range would give the San Diego-based company a valuation of about $1.92 billion, 13 times ServiceNow’s trailing 12-month sales. That’s more than twice the average valuation sought in the biggest U.S. software-company IPOs since the start of 2011, Bloomberg data show.

It’s a lower multiple than Facebook, which was valued at about 26 times sales in its May 17 IPO, the largest in history for a technology or Internet company. Morgan Stanley bought Facebook shares on behalf of the underwriting syndicate on the first day of trading to keep them from slipping below the $38 offering price, people familiar with the matter said at the time. The shares traded 13 percent below the IPO price as of yesterday.

“Facebook was a mistake from a pricing standpoint,” said Stanley Nabi, who helps oversee more than $10 billion as vice chairman of New York-based Silvercrest Asset Management Group. “Overpricing the next deal will taint” Morgan Stanley.

First-Day Pop

At the same time, underpricing the IPO may upset ServiceNow’s owners, including JMI Equity, Sequoia Capital and Greylock Partners. For entrepreneurs and venture capitalists, an IPO is a chance to partly cash out and to raise as much money as possible to fund a company’s growth. They normally keep most of their equity and sell down in later share sales. None of ServiceNow’s VC backers are selling in the IPO.

Greylock spokesman Tom Frangione declined to comment, as did Andrew Kovacs, a spokesman at Sequoia. Officials at JMI and Sequoia didn’t immediately respond to phone messages seeking comment.

“A first-day pop between 15 percent to 25 percent is the sign of a healthy stock -- above that it means the stock has been underpriced,” said Darren Hayes, the chairman of the computer information systems program at Pace University in New York and a former stockbroker.

More Feedback

To help abate concern, Morgan Stanley, which was criticized in the Facebook IPO for failing to listen to input from co-underwriters, is likely to give more heed to fellow managers Citigroup Inc. and Deutsche Bank AG, according to people familiar with the matter. Paul Chamberlain, Morgan Stanley’s co-head of the global technology group, is leading the ServiceNow IPO, said the people. Michael Grimes, who is co-head with Chamberlain, led the Facebook IPO.

Pen Pendleton, a spokesman for Morgan Stanley, declined to comment. Officials at ServiceNow didn’t respond to phone messages seeking comment.

A successful offering by ServiceNow may help improve sentiment for IPOs after initial sales globally have raised 50 percent less than a year ago, Bloomberg data show. Palo Alto Networks, an Internet security company, will base its plans to go public in July on ServiceNow’s early performance, while Kayak may set terms on its IPO if the offering goes well, said people familiar with the companies’ plans. Morgan Stanley is also leading those sales.

Rivals’ Performance

Rivals’ performance suggests ServiceNow might have room to rise at the midpoint valuation. Cornerstone OnDemand Inc., the maker of employee-development software, went public at about 14 times trailing 12-month sales in March 2011 and has since gained 67 percent through yesterday.

ServiceNow shares will probably initially “pop because it’s a good growth story in a hot industry,” said Francis Gaskins, president of researcher in Marina del Rey, California.

ServiceNow is led by Chief Executive Officer Frank Slootman, who previously ran Data Domain Inc. He sold the storage company for more than $2 billion in 2009 to EMC Corp. following a battle with NetApp Inc. that boosted the final takeover price by 34 percent.

Slootman’s Record

The company, which plans to list on the New York Stock Exchange under the symbol NOW, generated more than $150 million in revenue in the 12 months through March 31, while total customers grew 61 percent to 1,074. It posted a net loss of $10.3 million.

Slootman’s track record may help lure ServiceNow investors, said Peter Barris, managing general partner at New Enterprise Associates, a venture capital firm that backed Data Domain. Morgan Stanley should also be given the benefit of the doubt, though an unsuccessful debut for ServiceNow may have consequences.

“Morgan Stanley has led many of our IPOs and my experience with them has been fantastic,” said Barris. “If a ServiceNow IPO didn’t do well, I would be worried for the longer-term psychological impact.”

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