Morgan Stanley cut Facebook forecast
The day Facebook went public with its stock, the news was everywhere, including the Nasdaq board in Times Square. Now as the problems that bedeviled the initial public offering become clear, there are accusations and lawsuits. (May 18, 2012) Credit: Getty Images
In the run-up to Facebook's $16-billion IPO, Morgan Stanley, the key bank on the deal, delivered surprising and negative news to major clients: Its consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.
The sudden caution very close to Facebook's initial public offering was a big shock, said two investors who were advised of the revised forecast.
They said it might have contributed to the weak performance of Facebook shares, which sank on Monday and Tuesday -- their second and third days of trading -- to end more than 18 percent below the IPO price. The $38-per-share IPO price valued Facebook at $104 billion.
Tuesday, the Securities and Exchange Commission and the Financial Industry Regulatory Authority called for a review of the Facebook IPO, citing the issue of the revised earnings estimates. Also Tuesday, Massachusetts Secretary of Commonwealth William Galvin issued a subpoena to Morgan Stanley over its analyst's discussions with investors on Facebook.
Institutions and major clients generally enjoy quick access to investment bank research, while retail clients in many cases only get it later. It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly. The company declined to comment when asked who was told about the research.
The change in Morgan Stanley's estimates came after a May 9 regulatory filing by Facebook, in which the company expressed caution about revenue growth as users shifted to mobile devices. Mobile advertising has been less lucrative than advertising on desktops.
"This was done during the road show -- I've never seen that before in 10 years," said a source at a mutual fund firm who was among those called by Morgan Stanley.
JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates after Facebook's filing with the Securities and Exchange Commission, say sources familiar with the situation.
Morgan Stanley said in a statement that a "significant number" of analysts in the IPO syndicate reduced estimates after Facebook's May 9 disclosure. The investment bank said its procedures complied with all "applicable regulations."
Devitt did not return a call seeking comment. JPMorgan and Goldman declined to comment.
Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors.
Analysts, on the other hand, are required to operate independently of the bankers and salesmen who are marketing stocks. That independence was stipulated in a settlement by major banks with regulators following tainted stock research during the dot-com boom.
Out East with Doug Geed: Wine harvests, a fish market, baked treats and poinsettias NewsdayTV's Doug Geed visits two wineries and a fish market, and then it's time for holiday cheer, with a visit to a bakery and poinsettia greenhouses.
Out East with Doug Geed: Wine harvests, a fish market, baked treats and poinsettias NewsdayTV's Doug Geed visits two wineries and a fish market, and then it's time for holiday cheer, with a visit to a bakery and poinsettia greenhouses.
