Summary List Placement
When Palantir Technologies’ stock starts trading this week, Wall Street’s attention will be focused on the floor of the New York Stock Exchange in lower Manhattan.
It’s there that the company’s shares will change hands publicly for the first time, facilitated by a masked Citadel Securities employee working from a centuries-old floor now partitioned by sheets of plexiglass to protect against the coronavirus. Cable financial-news networks will broadcast the ringing of the opening bell.
If Palantir is anything like prior direct listings, it’s actually 80 blocks north, perched above Times Square, where a lot of the action will take place. There, on the fifth floor of Morgan Stanley’s global headquarters, is where the price of Palantir’s stock will largely be decided.
That’s because Morgan Stanley is the named adviser to the designated market maker, advising Citadel Securities on the price of the first trade, its timing and size. It has the same role on Asana’s public debut.
The Peter Thiel-backed data-analytics company and smaller software company Asana are using a relatively new way of going public known as a direct listing, which eschews the traditional IPO process and typically takes three to four hours to complete. Instead of selling stock to underwriters the night before, Palantir and Asana shareholders will sell directly to investors.
The direct listing is a model that’s won plenty of recent praise from VCs for democratizing the process and cutting down on fees paid to bankers, but the setup means employees and early investors looking to cash out have no idea what price they’ll get until they see the first trade.
That makes it the financial adviser’s role even more important and highlights its communication with the designated market maker, according to Joe Mecane, head of execution services at Citadel Securities.
“The process becomes a lot more involved,” he said. “Having this iterative dialogue with the advisor is critical.”
Palantir, led by CEO Alex Karp, is scheduled to begin trading on September 30. The Wall Street Journal reported last week that company’s bankers have told investors the shares could start trading at about $10, giving it a market capitalization of $22 billion. Asana, the Dustin Moskovitz-led software company that helps teams with project planning, is set to price the same day and become the fourth direct listing.
Morgan Stanley and Citadel Securities held the same role for the two previous direct listings — Spotify in 2018 and Slack Technologies a year later. If those are any guide, roughly 90% of $38 million Palantir earmarked for advisors — or $34 million — will flow to the company’s top two or three advisors. Credit Suisse, Goldman Sachs, and Allen & Co. follow Morgan Stanley in the filing.
The named adviser role that Morgan Stanley has is a coveted one among Wall Street banks because it puts their trading desk in the middle of the flow of buy and sell orders, and puts them in a stronger position to win future business. Other advisors or brokers are free to communicate directly with Citadel Securities, but they influence the trade size rather than the price.
If the Palantir process is managed like Spotify and Slack, much of the activity on Morgan Stanley’s trading floor Wednesday will center on John Paci, head of the bank’s Americas risk-trading desk and a former quarterback in the National Football League.
Paci is a Long Island native who set a college-football record by throwing a 99-yard touchdown pass at Indiana University in the 1990s. He later played for the hometown New York Jets. As a Morgan Stanley managing director, he’s played a central role in every high-profile IPO the bank has handled over the past decade or more, including Uber, Snap, and Zoom.
Paci declined to be interviewed for this story. A Morgan Stanley spokeswoman declined to comment, citing regulations around marketing ahead of deal pricings. This story is based on interviews with people who have been involved in past direct listings.
On those transactions, Paci presided over Morgan Stanley’s trading floor from a desk that sits perpendicular to other rows, the cross or top bar in a configuration could be described as an M and or a T.
Morgan Stanley salespeople and traders were set up along the legs of that formation, talking to company executives, venture-capital firms, or employees selling stock. Others sounded out prospective buyers. They shouted orders at Paci, who input them into a computer program known as an order-management system.
This week, Paci, like he has in the past, will create a supply curve with Citadel Securities reflecting how many shareholders are willing to sell and at what price. At the same time, they will create a separate demand curve, checking with investors to see how much stock they want and at what price. Talking through his floor broker or a NYSE employee, Paci will stay in close contact with Citadel Securities throughout the process.
The creation of both curves is key to the transaction’s success. One way to think about Snowflake’s IPO earlier this month, which popped more than 100% on the first day, is that the data-storage company couldn’t develop a robust demand curve before pricing. Too many investors wanted to buy the stock, almost at any price.
The process of opening the stock for the first time in a direct listing is similar to how a stabilization agent opens trading for a traditional IPO, or for that matter how the exchange market makers open shares for any trading day. It’s simply an auction that matches buyers and sellers. (Securities and Exchange Commission rules ensure all investors get the same price, even if some of them would be willing to pay more.)
One key difference is its sheer size. With a traditional IPO the number of potential sellers is only a couple of hundred who have been allocated shares the night before, whereas a direct listing could involve thousands of shareholders and employees. In the past two direct listings, it meant a much bigger percentage of the company’s shares traded hands the first day.
Another difference is that direct listings have relatively little information other than private market trades to inform the price on the first day. Traditional IPOs, by contrast, are priced the night before after weeks of back-and-forth talks between investors and underwriters.
A third is that direct listings give investors an opportunity to sell directly to the market, which they may not be set up to do. On the two prior direct listings, Morgan Stanley worked with shareholders to set up trading accounts, educated them on the process, and even helped them design trading strategies.
For institutions like venture-capital firms or family offices that may not have capabilities, the bank worked with their chief financial officer and operations staff to get their systems ready. Individual employees, too, often require advice on how to open brokerage accounts, so Morgan Stanley leaned on its network of wealth advisors, one of the largest in the US, to host companywide seminars and provide other resources to educate employees.
The educational component can get into the weeds of financial markets. One common question is when will Computershare, the industry’s transfer agent, move the shares into trading accounts where they can be sold?
Liquidity, liquidity, liquidity
All that preparation is important because it gives the adviser a good understanding of why people want to sell and at what price, and the stock doesn’t start trading unless someone is willing to sell.
As Paci and Citadel Securities’ employees evaluate the supply-and-demand curves, they will be looking for that price where there is strong buying support at a lower level and still enough buying interest at higher values. On Slack and Spotify, Morgan Stanley kept an open phone line for selling institutions so that they can hear the market chatter and understand where the demand for the stock is coming from. Everyone is looking to avoid a spike or plunge in the price, with as little volatility as possible.
Unlike in a traditional IPO, a direct listing doesn’t require banks like Morgan Stanley to exercise the greenshoe or act in a stabilization role to support the stock price or dampen volatility. That can increase the role that Citadel Securities plays as the DMM, according to Mecane, who said the firm highlights that service to prospective direct-listing clients. The company uses its “trading expertise and capital base” to help ensure a smooth debut, he said.
Palantir will test that process. Once Morgan Stanley and Citadel Securities decide on a price, if Spotify and Slack are any guide, the bank’s traders will shout it out above Times Square.
“One minute away … we’re locking it down … 30 seconds now.” The buzz on the trading floor will begin to crescendo. “We’re opening in 10 seconds.”
The bank will gather up its orders and route them electronically to Citadel Securities to execute on the exchange.
And with that Palantir will become a public company.
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