Facebook IPO debacle

Reuters reported (today) that Morgan Stanley alerted at least some investors during the Facebook IPO roadshow to a gloomier revenue forecast for the social network from the investment bank’s consumer Internet analyst.

“It’s extraordinary if in fact they did that,” said Geisst. “The public won’t understand or see it, but they will feel it.”

According to Reuters, fellow underwriters Goldman Sachs (GS: 97.53, +1.02, +1.06%) and JPMorgan Chase (JPM: 34.01, +1.50, +4.61%) also cut their revenue estimates around the same time.

That means that all three lead underwriters of the Facebook deal that valued the company at a whopping $104 billion increased the size and scope of the IPO while simultaneously growing less bullish on the stock.

“The allegations, if true, are a matter of regulatory concern” to the Financial Industry Regulatory Authority and Securities and Exchange Commission, Rick Ketchum, chairman of FINRA, told Reuters.

As a result, Morgan Stanley may have spent billions of dollars to support the stock price by buying shares in the market. Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it.

The firm did this by tapping into a 63 million share over-allotment option, or greenshoe, according to sources familiar with the deal.

As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion. Underwriters are not obligated to prop up a stock on debut, but typically do.

Morgan Stanley declined to comment.

Stiles said:
One more thing: the "A" shares on IPO offer carry one vote per share; Zuckerberg's retained shares ("B" shares) carry 10 votes per share. Not much is better than this at pointing out management's disdain for investors.

Facebook's class A vs B shares explained

PointBlank said:

I think that is pretty common.


(edit: Rookers beat me)

bean said:
Yeah, the big problem here isn't the two classes of stock, it's that big investors may have been tipped off to poor revenue figures before the public was told and before the stock went on sale, which is a pretty huge deal.

At heart, these arrangements are expressions of contempt for the very principle of taking a company public. Facebook didn't have to go public to raise money, of which it had plenty in the bank. It was pushed into doing so by federal law, which mandates public financial disclosures once shares in a company become distributed to a large enough insider group. Zuckerberg was indisputable king of Facebook the private company; so why should anything change for Facebook the public corporation?

"The idea is that the rest of us should be happy to go along," says Charles M. Elson, an expert in corporate governance at the University of Delaware. "You're assuming he's infallible, but if something goes wrong, you're powerless."

It won't do to argue that Zuckerberg's actions still affect only Facebook. As head of a public company, his actions will be scrutinized at a granular level as never before. The reverberations will be seen not only in their direct effect on the company itself, but in how they are regarded by investors in the stock market, whose take will in turn affect how the stock is priced and therefore the value of portfolios, small and large, in which they are held. That's a lot of responsibility for someone who must be considered — even if you accept his fawning treatment by the press — a novice.

It's not as though Facebook has clear sailing ahead. Its user growth rate has already slowed, its weak spot is advertising on the mobile devices through which more than half of its users log in, and major advertisers such as General Motors question whether Facebook ads work at all.

semiretiredpunk said:

Coyotemike said:
But...but...but...free market!!!

Darke said:
So shouldn't the people who offered insider tips and those that used them be, like, arrested?

Darke said:
So shouldn't the people who offered insider tips and those that used them be, like, arrested?

Regulators were also reported examining what happened with the underwriters, and the banking Committee of the US Senate was also informally gathering information on the case.

"If true, the allegations are a matter of regulatory concern to FINRA and the SEC," Rick Ketchum, the chief executive of the Financial Industry Regulatory Authority, said in a statement.