Projected to raise more than 104 billion dollars, the Facebook IPO is was on course to be the largest tech IPO in history. From Mark Zuckerberg’s expected worth, to the company’s quickly growing user base, there’s a lot to consider about this historic initial public offering. While investigators speculate if Facebook, which derives most of its revenue from ad sales, will be able to grow and manage its main source of income, fanatic
Facebook’s stock has dropped 16 percent since the initial share sale, spurring shareholder suits from New York to California. They allege that Facebook and its underwriters misled investors by failing to disclose the figures to a wider audience. Information is material if it would probably affect a company’s share price, if known. The stock gained 3.2 percent to $33.03 at 4 p.m. in New York today.
This latest chapter in the Facebook IPO story began this morning, when Reuters’ Alistair Barr reported that the research analysts at the company’s lead underwriters— Morgan Stanley, Goldman Sachs, and JP Morgan—had cut their earnings estimates for Facebook during the company’s IPO roadshow. This was highly unusual, if not unprecedented
Analysts cutting estimates is generally regarded as significant negative news for stocks. This is especially the case when the analysts who cut their estimates are thought to be very close to a company—and, therefore, to have particularly good information.
(In the old days, before the implementation of Regulation Fair Disclosure, companiesused to manage the market’s expectations by telling trusted analysts to change their estimates. Reg FD banned that practice.)
The fact that some potential Facebook investors were told of the analysts’ estimate cuts and others were not would seem to be a major “selective dissemination” issue.
It is inconceivable that a reasonable investor would consider the sudden reduction of analysts’ estimates to be immaterial to an investment decision—especially if they analysts had privileged access to the company.
The SEC and FINRA appear to have acknowledged this, and they may now investigate what happened.
More broadly, everyone is still trying to understand what happened with the pricing of the IPO, which was hyped up to be the offering of the century. We now have some more information on that.
Given the PR and legal disaster that the Facebook IPO is rapidly becoming, most official communicationschannels have gone silent.
In the past few hours, we have spoken to several sources familiar with aspects of the transaction. We do not have complete details yet, but a general picture of what happened is starting to take shape. For now, please regard most of the information below as scuttlebutt, as it has not yet been confirmed.
The story we are hearing is this…
In early May, as Facebook prepared to kick off its IPO roadshow, the research analysts at the company’s lead underwriters developed financial forecasts to facilitate the marketing and pricing of the IPO.
Such estimates are usually developed through close collaboration between the underwriters’ research analysts and company management. These estimates are generally viewed by sophisticated investors as having been “blessed” by the company: They are perceived as revenue and earnings targets that the company has reviewed and believes it will hit. Sophisticated investors use these estimates when they are developing “bids” for the stock, as a tool with which to help determine the price they are willing to pay.
mportantly (and absurdly—the SEC needs to change this), these estimates are not published anywhere.
Rather, in conjunction with industry convention, these estimates are conveyed verbally to institutional investors who are considering investing in the IPO.
Whilst there is so much debate about what Facebook is worth today as a company, I think there should be a focus on where Facebook could be in 5 years from now. The phenomenon may not have reached its summit yet, as there is ample room for wider revenue propositions.
Visit http://www.schools.com/imagesvr_ce/6508/FB_IPO_Final.jpg to see Info graphic above