So, the book of faces had the biggest IPO in history, with the initial price supposed to be $28/share. All the hype prompted their underwriters (lead underwriter Morgan Stanley, JP Morgan Chase - which just lost 2-3 billion dollars on speculative trading - & Goldman Sachs) to issue 25% more shares and jack the price up to an astounding and lofty $38/share, which valued the company at a stunning $104 Billion. On the first day of trading, the stock briefly hit $45/share before plummeting, prompting Morgan Stanley to intervene by buying shares until they came back up to the IPO price.
They couldn't prop up the stock forever...
Did I mention the stock closed today at a mere $31/share? That's an 18% loss in a mere 3 trading days.
And now the other shoe drops:
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.
Translated, that means that those big wall street firms tipped off big institutional investors of financial weakness while leaving individual investors in the dark, and increasing both the initial offering price and the number of shares to be sold in order to take advantage of as many ill-informed investors as possible.
Look for a LOT of litigation to come from this, and if anyone needs even more proof that Wall Street needs reigning in, this is a good example. Since this was so hyped, there was a lot of individual investors buying the IPO and thus a lot of people lost a lot of money while Zuckerberg got his and Morgan Stanley made $67 million in fees. Of note, the cost to Morgan Stanley of propping up the stock on the first day may be enormous - possibly far more than it made in fees.
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.
I think it's safe to say this whole thing was a pretty massive clusterfuck.
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.
Stiles
Oakland, CA
November 2002
MAY 22, 2012 09:09 PM