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Morgan Stanley Cut Facebook Estimates Just Before IPO

Reuters  |  By Posted: Updated: 05/22/2012 9:00 am

By Alistair Barr

(Reuters) - In the run-up to Facebook's $16 billion IPO, Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered some negative news to major clients: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.

The sudden caution very close to the huge initial public offering, and while an investor roadshow was underway, was a big shock to some, said two investors who were advised of the revised forecast.

They say it may have contributed to the weak performance of Facebook shares, which sank on Monday - their second day of trading - to end 10 percent below the IPO price. The $38 per share IPO price valued Facebook at $104 billion.

The change in Morgan Stanley's estimates came on the heels of Facebook's filing of an amended prospectus with the U.S. Securities and Exchange Commission (SEC), in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date is less lucrative than advertising on a desktop.

"This was done during the roadshow - 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 in response to Facebook's May 9 SEC filing, according to sources familiar with the situation.

Morgan Stanley declined to comment and Devitt did not return a phone message seeking comment. JPMorgan and Goldman both declined to comment.

Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors. Investment bank analysts, on the other hand, are required to operate independently of the bankers and salesmen who are marketing stocks - that was stipulated in a settlement by major banks with regulators following a scandal over tainted stock research during the dotcom boom.

The people familiar with the revised Morgan Stanley projections said Devitt cut his revenue estimate for the current second quarter significantly, and also cut his full-year 2012 revenue forecast. Devitt's precise estimates could not be immediately verified.

"That deceleration freaked a lot of people out," said one of the investors.

Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates.

"They definitely lowered their numbers and there was some concern about that," he said. "My biggest hedge fund client told me they lowered their numbers right around mid-roadshow."

That client, he said, still bought the issue but "flipped his IPO allocation and went short on the first day."


Sweet said analysts at firms that are not underwriting IPOs often change forecasts at such times. However, he said it is unusual for analysts at lead underwriters to make such changes so close to the IPO.

"That would be very, very unusual for a book runner to do that," he said.

The lower revenue projection came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34-$38, and before Facebook increased the number of shares being sold by 25 percent.

The much-anticipated IPO has performed far below expectations, with the shares barely staying above the $38 offer price on their Friday debut and then plunging on Monday.

Companies do not make their own financial forecasts prior to an IPO, and underwriters are generally barred from issuing recommendations on the stock until 40 days after it begins trading. Analysts often rely on guidance from the company in building their forecasts, but companies doing IPOs are not permitted to give out material information that is not available to all investors.

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 firm declined to comment when asked who was told about the research.

"It's very rare to cut forecasts in the middle of the IPO process," said an official with a hedge fund firm who received a call from Morgan Stanley about the revision.

(Editing by Jonathan Weber, Martin Howell and Ian Geoghegan)

A look back at the hottest tech IPOs of the past year (excluding Facebook):
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  • Zynga: $1 Billion

    Social gaming company Zynga raised $1 billion in its IPO in December, 2011, the biggest web-related IPO since Google, <a href="" target="_hplink">according to the Associated Press</a>. Zynga had a valuation of $7 billion before it began trading on the Nasdaq on December 16. By May 17, 2012, the social games company <a href="" target="_hplink">was worth $6.09 billion</a>.

  • RenRen: $743 Million

    RenRen, the Chinese social networking site, raised $743 million in its IPO in May 2011, <a href="" target="_hplink">according to Reuters</a>. At the end of its first day of trading, the company had a market value of $7.4 billion. As of May 17, 2012, RenRen's <a href="" target="_hplink">market capitalization stood at $2.43 billion</a>.

  • Groupon: $700 Million

    The daily deals site <a href="" target="_hplink">raised $700 million in its IPO</a> in November 2011, valuing the company at nearly $13 billion. As of December 16, 2011, Groupon's value was $14.4 billion, and by May 17, 2012, the <a href="" target="_hplink">daily deals site's market cap had dropped</a> to $7.92 billion.

  • LinkedIn: $352 Million

    LinkedIn, the professional social network, <a href="" target="_hplink">raised $352 million</a> in its IPO in May 2011. According to Reuters, the company was worth $9 billon after its first day of trading on the public market. As of May 17, 2011, <a href="" target="_hplink">LinkedIn's value stood at</a> $10.8 billion.

  • Pandora: $234 Million

    Internet radio site Pandora raised $234 million when it went public in June 2011, valuing the company at $2.56 billion, <a href="" target="_hplink">according to <em>The Wall Street Journal</em></a>. In May 17, 2012, <a href="" target="_hplink">the company had a value of</a> $1.75 billion.

  • HomeAway: $216 Million, a vacation home rental site, raised $216 million in its IPO in June 2011, <a href="" target="_hplink">according to MarketWatch</a>. In its first day of trading, <a href="" target="_hplink">reports TechCrunch</a>, the company had reached a valuation as high as $3 billion. As of May 2012, <a href="" target="_hplink">HomeAway had a market cap</a> of $2.1 billion

  • Demand Media: $151 Million

    Demand Media, a web content company, or "content farm," <a href="" target="_hplink">raised $151 million</a> in January 2011. <a href="" target="_hplink"><em>The Wall Street Journal</em> reports</a> that the company was worth a whopping $1.78 billion after its first day on the New York Stock Exchange. As of May 17, 2011, <a href="" target="_hplink">the company's market cap</a> had fallen to $771.2 million. In the photo above, Richard Rosenblatt, Chairman and CEO of Demand Media, joins Tyra Banks at the New York Stock Exchange on March 15, 2011.

  • Angie's List: $130 Million

    Angie's List, a site where members can review doctors, contractors and more, raised $130 million in its November 2011 IPO, <a href="" target="_hplink">according to VentureBeat</a>. The AP notes that at the end of the first day of trading, the company was valued at $904 million. As of May 17, 2012, <a href="" target="_hplink">the site had a market cap</a> of $761.7 million.

  • Yelp: $106.5 Million

    Yelp, the business review site, <a href="" target="_hplink">raised $106.5 million in its March 2012 IPO</a>, valuing the company at almost $900 million, according to Reuters. As of May 17, 2012, <a href="" target="_hplink">Yelp had a market value of $1.3 billion</a>.

  • Zillow: $69 Million

    <a href="" target="_hplink">According to TechCrunch</a>, the real estate website Zillow raised about $69 million in its July 2011 IPO. The value of the company <a href="" target="_hplink">rose to as high as $1.6 billion</a> on the first day of trading but dropped to $950 million at market close. As of May 17, 2012, <a href="" target="_hplink">Zillow's market valuation</a> was $1.1 billion.


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