Morgan Stanley Group, Inc.: Initial Public Offering

Abstract

This case involves the analysis of the price at which Morgan Stanley proposes initially to offer its shares. The required analysis includes various valuation techniques, as well as the qualitative assessment of strategic and environmental factors. A student Lotus worksheet file is available on computer diskette for use with this case. Excerpt UVA-F-0719 MORGAN STANLEY GROUP, INC.: INITIAL PUBLIC OFFERING On February 14, 1986, the investment bank of Morgan Stanley & Co. issued a preliminary prospectus for the sale of 4,500,000 shares of its own common stock to the public at a price estimated to be between $ 42 and $ 46 per share. This move signaled a new era in the firm's history, as previously Morgan Stanley had been organized as a “partnership” consisting of 111 managing directors and 143 principals. The offering raised numerous questions: Why had Morgan Stanley chosen to go public rather than sell to a large and well-capitalized buyer? Why did Morgan Stanley need external capital at all? Securities Industry Morgan Stanley competed with an array of firms providing underwriting, financial advice, distribution, and trading/market-making functions. Exhibit 1 provides general financial information on major domestic investment banks but, in addition, Morgan Stanley regarded itself as an international securities firm and included in its realm of competitors merchant banks (for example: S. G. Warburg & Co.), universal banks (for example: Deutschebank), the London investment banking subsidiaries of U.S. money center banks, and large Japanese financial services firms (for example: Nomura Securities). Several trends were changing the competitive structure of the securities industry. Exhibit 2 suggests the magnitude and avenues of change. The trends included increasing concentration of competition, technological change in information support systems, rising demand for a highly specialized work force, innovation in the design of financial securities, the advent of globalized trading and underwriting, inter-market trading (for example: between futures, options, and stocks), and quasi-merchant banking activities. Of special significance was the introduction of Rule 415 in 1982, which allowed corporations to keep registration statements “on the shelf” and quickly (i.e., in two days) issue securities. This rule was credited with eroding investment banking relationships and motivating issuers to seek bids for underwriting business. More recently, investment bankers had begun to bid for the entire underwriting issue in “bought deals” that were then sold directly to investors and distributed to other firms. The new levels of competition in underwriting required more capital. . . .