MSCI Inc. (MXB) is a recent spinoff from Morgan Stanley (MS).  The company has been under pressure after its last quarterly earnings announcement which left investors wishing for more.  Zachstocks covered the stock last week in the wake of the sell-off.  Although the article raises concerns about a high multiple during a contracting economic environment, perhaps the more important issue with the stock is Morgan Stanley’s large ownership and their future plans.

That concern has been brought to light this week as Morgan Stanley offered 26 million shares to the market at $32.00 per share Tuesday night.  The parent company is reducing their position by 43.36% which is somewhat concerning considering the inside information Morgan Stanley is privy to and the fact that they still have roughly 30 million shares that they could dump on the market in the next few months.  This is actually the second time selling shareholders have brought stock to market as there were 30.9 million shares liquidated on May 2.

To be fair, there could be a legitimate reason for Morgan Stanley to liquidate the shares without it being a negative implication for MXB.  At this point in time many brokerages are facing liquidity shortfalls and the ability to raise capital is constrained.  Selling off an investment like MXB may be the most appropriate way to raise capital necessary to fund Morgan Stanley’s core business.  The disappointing side of this type of transaction would be that MS essentially forfeits the benefit of owning a strong company that it has built from the ground up.

Looking at the offering, it should be noted that supply was likely much higher than the underlying demand.  I indicated for stock for my fund as it is necessary for the fund to be involved in most every deal in order to keep relationships intact with the underwriters.  Unfortunately I received everything I asked for which is often a telling signal that the deal is not fully subscribed.  The bottom line is that there is not much demand for the deal.  After pricing at $32.00 (which was 16 cents below the closing price) the stock immediately traded down and settled in a range of $31 to $31.75.  A busted secondary offering has a good chance of leading to lower prices.

I would use caution with the stock going forward and will look to re-establish a short position when possible.  I am sitting on much of the stock I received in the secondary offering but managers like me who received shares and are under water will likely get nervous and quickly turn to sellers.  That could maintain the short-term selling pressure and then looking farther down the road, the concerns over the multiple in a difficult environment may continue to pressure the stock.

FD: Author has a long position in MXB

Additional Reading:

Zachstocks covers the earnings report and subsequent decline

Barrons notes insiders buying shares of MSCI