Devitt's agreement with his clients guarantees an independent analysis of company performance -- even if Morgan Stanley is leading the IPO. The stark division between these two functions of a bank is known as a "Chinese Wall.
Morgan Stanley and other brokerage firms were slammed with fines for repeatedly breaching the "Wall" during the dot-com boom. In the aftermath of the Facebook IPO, the bank would find itself under the spotlight yet again for allegedly sharing key, private information with wealthy clients. A roadshow -- a city-by-city promotional tour where executives drum up support for their IPO before large investors -- is typically a lackluster affair.
Facebook's was more like a Hollywood party. A crowd of paparazzi greeted them, and a long line of onlookers wound around the hotel building. Inside the meeting, Facebook played a video introducing the business model to special clients of its underwriting banks. Although an IPO roadshow is supposed to be an untarnished hype-machine for a company's prospects, back in California, those prospects were hurting. Facebook's new internal forecasts showed revenue growing slower than expected.
The reason: Users were flocking to smartphones faster than the company could serve mobile ads. On the first day of what may have been the most watched IPO roadshow in memory, Ebersman confessed to Morgan Stanley that Facebook had cut revenue projections -- a nearly unprecedented last-minute correction in an IPO of its scale. Even if the changes were small, statistically, in IPO showbiz statistics run second to momentum, and nothing kills momentum like a poorly timed downward revision.
Facebook and Morgan Stanley knew they had to make a public disclosure. But what to disclose? The law requires companies to share all information that would likely influence an investor's decision to buy stock. Plus, Morgan Stanley's research team was still advising clients based on figures that Facebook now considered wrong.
With less than a week before the IPO, they came up with a solution that they thought would spare Facebook a modicum of embarrassment -- but would have fateful consequences for Morgan Stanley and investors:. When a company makes an amendment to its S-1, the entire document can be filed again, without track-changes or highlights to specify the changes. When Facebook filed its "Amendment No. On page 14 and 17, the company said that its users were growing faster than ads due to the increased use of mobile phones and product decisions that allowed fewer ads per page.
On page 57, Facebook said the mobile trend discussed elsewhere in the document had continued in the second quarter, due to users shifting from computers to phones. None of the changes suggested any major revision to Facebook's financial outlook. Facebook's lowered revenue estimates did not appear in the S-1, nor was there any precedent requiring these numbers to be included. Even the most sophisticated retail investors, armed with a software bot that could comb the new S-1 for updates, could not have read what research analysts at Morgan Stanley, JP Morgan, Goldman Sachs, Citigroup, and many other investment banks would learn later that evening: That Facebook, already projected to trade at high multiples given its earnings figures, was slashing its annual projections.
Before an IPO of Facebook's size, research analysts and large investors play a massive multi-billion-dollar game of "Telephone," because analysts at underwriting firms are banned from publishing or emailing research about a new public company until 40 days after the IPO. The rule is designed to protect retail investors from taking analysts' notoriously bullish research too seriously. But it has an unintended side effect: Research analysts can pass on exclusive, last-minute information to institutional clients without a paper trail.
After the company's surprising eleventh-hour amendment, the unenviable job of explaining Facebook's revisions to the research analysts fell to Cipora Herman, Facebook's vice president of finance. He played the part of an analyst, while she played herself.
They practiced until the amended S-1 was officially made public on the SEC website, at exactly pm. Before her first call to Scott Devitt at Morgan Stanley, Grimes left the room to avoid the appearance of breaking the law that bans investment bankers from influencing analysts. But Herman had a script in Grimes' handwriting detailing Facebook's new second-quarter revenue estimates:.
Herman's first three calls were to the research desks of Morgan Stanley, JPMorgan, and Goldman Sachs, and after their conversations, all three banks cut their estimates of Facebook's annual revenue by between 3. The news spread -- from research analysts to their preferred clients -- that Facebook was slashing revenue estimates in the middle of the roadshow.
Even analysts who hadn't yet made a single call about Facebook's new figures were being inundated with questions. Many large investors sensed a rare opportunity: With its revenue projections falling at such a peculiar time, the conditions could be perfect to place a massive bet against Facebook stock. On May 11, Bloomberg reported that demand for Facebook's stock among institutional investors was much lower than expected. But on the same day, Reuters had a conflicting report: Facebook was already oversubscribed, and one large unnamed institutional investor was calling around syndicate desks trying to get more shares.
While retail investors clamored for Facebook shares, some large investors were planning a massive short -- essentially betting against the stock's buyers. Scott Sweet, senior managing partner of Tampa-based research firm IPO Boutique, received calls from hedge fund clients saying they heard from research analysts at underwriting banks that Facebook's mobile trend was behind its lowered earnings estimates.
One multi-billion dollar hedge fund client told Sweet that he planned to short the stock as a result. Sweet didn't name the investor due to a confidentiality agreement he has with clients. A day later, they increased supply to more than million shares.
Back in her home, Swaminathan didn't know about the reduced revenue estimates or about the vast number of hedge funds that were planning to short Facebook. After the opening bell ceremony neared its end at a. Minutes later, Swaminathan, eager for the stock to open, called her son, who lives in New York City, to inform him about the 5, shares she had ordered.
Her son, who studied finance at UC Berkeley, was livid. Cancel it! At a. In all the times she had seen IPOs on television, Swaminathan had never witnessed a market delay on the opening day. Something is wrong, she thought. She turned her attention to her computer screen only to realize that there was no sign of her having voided the order. She kept refreshing the page in hopes of seeing the notification.
When no cancellation report appeared, she called her stockbroker at Vanguard. If the cancel order was placed, then it's probably cancelled, the broker told her. She got off the phone and went back to her computer screen. There was no sign of cancellation. She called Vanguard again. This time, she says, she waited on the line for a long time, but no one came to take her call.
Meanwhile, Facebook stock opened at a. The mysterious delay was due to technical glitches. In the first 30 seconds, around 82 million shares were exchanged. Facebook did not experience the anticipated pop. At p. Later that day, the Wall Street Journal reported that Morgan Stanley had stepped in to stabilize the stock, using what is referred to in finance as a "greenshoe option" -- a common stipulation in the IPO agreement that lets underwriting banks sell more shares to investors than they are allotted.
The mechanism lets banks buy back the shares at the offering price, in case the company's stock price needs a little help on the first day. The buying action puts upward pressure on the stock. Her son came to New Jersey to stay with her over the weekend. For two days, they quarreled. He wanted to know why she put so much money into one stock, and she couldn't give him a satisfying answer.
On Monday morning, she called Vanguard. Her son advised her to hold onto her shares until she either resolved the matter with Vanguard or the price bounced back. The next couple days were a blur. Swaminathan approached Vanguard again, asking why the cancel order wasn't processed. She could have sold the shares before the price plummeted, she said to the broker, asking to speak with a supervisor.
When she called a day later, Vanguard declared it a legitimate purchase. There was nothing that could be done for her. In Microsoft beat out Google to purchase a 1. Zuckerberg wanted to wait to conduct an initial public offering, saying in that "we are definitely in no rush.
Zuckerberg had little choice as to whether an IPO had to be done at once. To ensure that early investors would retain control of the company, Facebook in instituted a dual-class stock structure. The roadshow faced a "rough start" initially. Prior to the official valuation, the target price of the stock steadily increased.
Strong demand, especially from retail investors, suggested Facebook could choose a relatively high offering price. The Facebook IPO brought inevitable comparisons with other technology company offerings. Some investors expressed keen interest in Facebook because they felt they had missed out on the massive gains Google saw in the wake of its IPO. Its PE ratio was 85, despite a decline in both earnings and revenue in the first quarter of A number of commentators argued retrospectively that Facebook had been heavily overvalued because of an illiquid private market on SecondMarket , where trades of stock were minimal and thus pricing unstable.
Facebook's aggregate valuation went up from January to April , before plummeting after the IPO in May - but this was in a largely illiquid market, with less than trades each quarter during and Prior to the IPO, several investors set price targets for the company. Much of Wall Street expressed concerns over what it saw as a high valuation.
Citing the price-to-earnings ratio of for , critics stated that the company would have to undergo "almost ridiculous financial growth [for the valuation] to make sense. Writers at TechCrunch expressed similar skepticism, stating, "That's a big multiple to live up to, and [Facebook] will likely need to add bold new revenue streams to justify the mammoth valuation".
Early investors themselves were said to express similar skepticism. Warning signs before the IPO indicated that several such investors were interested in selling their shares of the company. Striking an optimistic tone, The New York Times predicted that the offering would overcome questions about Facebook's difficulties in attracting advertisers to transform the company into a "must-own stock".
Some analysts expressed concern over Facebook's revenue model; namely, its advertising practices. In the immediate build-up to the offering, public interest swelled. Some said it is "as much a cultural phenomenon as it is a business story.
Trading was to begin at am Eastern Time on Friday, May 18, The stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back shares to support the price. The opening was widely described by the financial press as a disappointment. Despite technical problems and a relatively low closing value, the stock set a new record for trading volume of an IPO million shares.
Facebook's share value fell during nine of the next thirteen trading days, posting gains during just four. Price targets for the new stock ranged considerably. On June 4, seven of fifteen analysts polled by FactSet Research suggested prices above the stock's price, effectively advising a "buy. The IPO had immediate impacts on the stock market. Other technology companies took hits, while the exchanges as a whole saw dampened prices. Investment firms faced considerable losses due to technical glitches.
The IPO impacted both Facebook investors and the company itself. It was said to provide healthy rewards for venture capitalists who finally saw the fruits of their labor. Some suggested implications for companies other than Facebook specifically. The IPO could jeopardize profits for underwriters who face investors skeptical of the technology industry. While expected to provide significant benefits to Nasdaq, the IPO resulted in a strained relationship between Facebook and the exchange.
More than 40 lawsuits were filed regarding the Facebook IPO in the month that followed. Additionally, a class-action lawsuit is being prepared [ by whom? In June , Facebook asked for all the lawsuits to be consolidated into one, because of overlap in their content. Facebook's IPO is now under investigation and has been compared to pump and dump schemes.
Before the creation of secondary market exchanges like SecondMarket and SharesPost, shares of private companies had very little liquidity; however, this is no longer the case. Facebook employees had been finding private buyers to unload their shares as early as , and when SharesPost launched in , early employees started exiting en masse.
In interviews with the media, bankers seemed sanguine about the outcome. Morgan's reputation in technology IPOs was "in trouble" after the Facebook offering. But by signing off on an offering price that was too high, or attempting to sell too many shares to the market, Morgan compounded problems, senior editor for CNN Money Stephen Gandel writes. According to Brad Hintz, an analyst at Sanford Bernstein, "this is something that other banks will be able to use against them when competing for deals.
From Wikipedia, the free encyclopedia. Overview of the initial public offering of Meta then known as Facebook, Inc. The Greenburgh Daily Voice. Retrieved 18 July Salmon writes that the reason it had more than shareholders is because "early investors, including Accel and DST, have been selling down their stakes in private markets for some years now. PC Magazine. February 1, Retrieved May 18,
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