By Matt Jarzemsky
Shares of Moelis & Co. opened higher in their trading debut,
after an initial public offering that priced below the New York
investment bank's expectations.
As far as investment banker Ken Moelis is concerned, the IPO of
his eponymous advisory firm, which he founded in 2007 after
departing from UBS AG, was yet another successful deal.
In an interview on Wednesday afternoon, he said he was pleased
that investors in the deal got to see the stock rise in first-day
trading. "If I had written it up in the locker room, this is how it
would have turned out."
The firm sold 6.5 million shares in its debut, raising $162.5
million before the potential sale of additional shares by
underwriters. The sale fell short of the company's projection to
sell 7.3 million shares for $26 to $29 each, according to a
regulatory filing. The proceeds will be used to buy back shares
from early partners, the company said its IPO prospectus.
The shares held the gains in early trading, after opening on the
New York Stock Exchange at $27, up 8% from the company's $25 IPO
offer price. In midafternoon trading they were up 5% at $26.26. The
stock-market value of the firm stands at about $1.3 billion,
according to FactSet, with Mr. Moelis and his family's stake worth
around $400 million.
The lackluster pricing follows a pullback in U.S. stocks in
recent weeks, particularly in shares of many newly public
companies. IPOs have still been getting done this week, but all
five U.S.-listed debuts to price since the weekend have seen
investors offer a lower per-share price than the companies had
expected.
Demand for shares of newly listed companies has suffered
alongside the past month's selloff in certain parts of the market,
such as high-growth technology and biotechnology stocks.
Mr. Moelis said that he and his underwriters, led by Goldman
Sachs Group Inc., were taken aback by the market's poor performance
last week.
"This volatility hit hard and fast. When we gave the go ahead, I
thought it was blue skies," said Mr. Moelis.
He said the group discussed on Friday possibly postponing the
pricing of the deal, citing sharp declines in the Dow Jones
Industrial Average and news that Russia could be on the verge of
further military action in Ukraine. Mr. Moelis said he pressed for
a deal even smaller than the reduced 6.5 million shares they
ultimately sold.
But Mr. Moelis and his bankers decided not to reduce the size
any more, to retain sufficient liquidity to attract big investors.
They settled on the below-range price of $25 as a way to try to
ensure that the stock rose in first-day trading to reward those
investors for buying into the deal.
"We don't need the proceeds to run the company, we have no
leverage," he said. "I was intent on one thing: A good transaction
for our investors....I think it's essential that they come out
ahead."
Shares of the so-called investment banking boutiques that
closely resemble Moelis haven't escaped the selling. Evercore
Partners Inc. 's shares fell 17% this year through Tuesday while
Lazard Ltd. declined 2.4%. They are up 31% and 29% the past 12
months, respectively, well ahead of the S&P 500's 17%
advance.
Now, Mr. Moelis must return to work and deliver on the promises
he made to get the deal done. During the company's pitch to
investors, it said it planned to increase the productivity of its
bankers from $4.8 million a head to between $6 million to $9
million.
Already, the first quarter saw Moelis's revenues jump to an
estimated $113 million to $115 million, compared with $60 million a
year earlier, according to a regulatory filing.
Mr. Moelis said that the "superstars" he hired from bigger Wall
Street banks during the financial crisis on his way to growing to
over 300 bankers, are still learning the firm's culture and ramping
up to their full productivity. He said that because bankers at
Moelis don't work for individual commissions, it took time to get
them functioning in teams.
"I wouldn't annualize the percentage [growth rate in the first
quarter]....but we have a strong business and our MDs are spending
more time on the platform, getting used to a different model, a
team platform, " he said.
At the IPO price of $25, Moelis's proposed dividend of 17 cents
a quarter translates into a yield of 2.7%, above the S&P 500
index's yield of 2%, according to FactSet.
Other independent adviser firms, such as Greenhill & Co.,
have paid better-than-average dividends and bought back shares to
offset the grant of stock to bankers as compensation, as a further
way of returning cash to shareholders. Mr. Moelis said that he
expected his firm to follow a similar model.
"If you stick to advice only, you have no real use for capital.
You should return all of your cash generation to shareholders," he
said, referring to the fact that unlike big banks, Moelis doesn't
use its capital to lend or facilitate big trades for investors.
As for the firm's book club--in which about 60 people
participated in the first reading, of Ayn Rand's "Atlas Shrugged"--
the 55-year-old said he had not yet settled on the next selection.
"I'll have to choose a different philosophical bent," he said.
With up to 5% of the stock offering reserved for employees,
officers and others close to the firm, Mr. Moelis suggested
jokingly that perhaps the IPO prospectus should be required
reading. "Everybody is an owner. We like that," he said.
Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com and Telis
Demos at telis.demos@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires