Morgan Stanley Dieselgate Decision Cost It Top Porsche IPO Role

(Bloomberg) -- Morgan Stanley's decision to stop financing Volkswagen AG during the height of the diesel emissions scandal cast a long shadow on its attempts to land a top role on the blockbuster Porsche listing, people familiar with the matter said.

The Wall Street giant was among select banks that pitched to help lead the initial public offering of VW's iconic sports-car brand, which could be valued at 90 billion euros ($99 billion), the people said, asking not to be identified discussing confidential information.

VW eventually opted for Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. as joint global coordinators, Bloomberg News reported last week.

Three of these -- Bank of America, Citigroup and Goldman Sachs -- were among the banks that in 2015 provided a roughly 20 billion-euro bridge loan to VW to help it manage the financial fallout from its admission that it rigged vehicles to cheat diesel emission tests.

Morgan Stanley's decision to cut funding to VW during the so-called Dieselgate scandal, which cost Europe's largest automaker about 30 billion euros, contributed to it missing out on a role leading the Porsche IPO, according to the people. While some of its investment bankers pushed to contribute funding, top management vetoed the idea because of concerns about risk, one of the people said. The bank has been trying hard ever since to rebuild the VW relationship.

Citigroup's longstanding banking and financing ties with VW, including support during the emissions scandal, helped it trump Morgan Stanley for the fourth slot, the people said. The Porsche mandates were some of the most highly-contested roles this year in Europe, including video contributions from the banks' chief executives, Bloomberg previously reported.

Long Memories

Investment banks often opt against lending to companies or individuals based on their internal risk assessments, and some have become more cautious in recent years amid losses linked to corporate and trading scandals.

The decision by VW not to pick Morgan Stanley illustrates the tough balancing act faced by investment banks, which need to manage risks while trying to stick with big corporate clients that can have long memories when doling out big deal mandates.

SoftBank Group Corp. asked banks jostling for places on a potential U.S. listing of Arm Ltd. to underwrite an $8 billion margin loan. Goldman Sachs, JPMorgan and Mizuho Financial Group Inc. are leading the loan and are expected to have prime spots on the IPO, Bloomberg News has reported.

Morgan Stanley also decided not to participate in the SoftBank margin loan and doesn't expect a lead role on the Arm IPO, a person with knowledge of the matter said.

Representatives for VW, Morgan Stanley and SoftBank declined to comment.

Fee Falls

VW plans to list a minority stake in Porsche in the fourth quarter to help finance the industry's biggest push into electric cars and boost its valuation. Depending on the valuation it seeks, the Porsche IPO could end up as Germany's biggest ever, surpassing Deutsche Telekom AG's $13.1 billion share sale in 1996.

Morgan Stanley wasn't the only bank to come up short, as VW surprised advisers by also omitting Deutsche Bank AG, long a mainstay in the boardrooms of Germany's blue-chip companies. While both banks could still land junior roles, it may be little consolation in a tough market for new listings.

The Porsche deal is likely to provide a much-need boost in a moribund year for global IPOs, with fundraising volumes down 70% at the end of the first quarter, according to data compiled by Bloomberg. If the market turmoil persists, analytics firm Coalition Greenwich estimates that equity underwriting fees could sink by more than half in 2022.

Failing to land a lead role on the Porsche IPO, and the chance to clinch a bigger share of the fees on offer, could also hurt Morgan Stanley's advisory rankings. The bank currently ranks second on equity capital markets deals globally, trailing Goldman Sachs, Bloomberg data show.