Where are Facebook's friends? In less than a week, investors, markets, and now regulators certainly "dislike" Facebook as its stock slides deeper.
May 22, 2012 7:55pm EST – Massachusetts Secretary of the Commonwealth William Galvin has subpoenaed Morgan Stanley over questionable actions surrounding its role as lead underwriter of Facebook’s (NASDAQ: FB) (PrivCo Ticker: FACEP) IPO.
The subpoena accuses Morgan Stanley of discussing Facebook’s lower revenue projections with certain institutional investors – a move which possibly violates Massachusetts state securities law.
PrivCo pieces together the chronology and related missteps of Facebook’s IPO to date based on public records and confirmed sources as follows:
- March 31, 2012: Facebook ends Q1 2012 with disappointing numbers based on rapid mobile adoption damaging revenues faster than expected.
- April 1, 2012: Facebook begins Q2 2012.
- April 2-8, 2012: Internal metrics predict continued revenue deceleration and lower engagement for Q2 2012 due to a rapid shift to the mobile platform.
- April 9, 2012: Based on deteriorating metrics and the rapid mobile shift, Zuckerberg acts alone in making a knee-jerk $ 1 billion acquisition of Instagram.
- April 23, 2012: Zuckerberg follows the Instagram acquisition with another panicky acquisition of AOL mobile patents from Microsoft for $550 million.
- April 23, 2012: Facebook files an S-1 amendment for Q1 2012 with decelerating revenue trends. Facebook blames the weakness on "seasonal trends."
- April 24-May 6, 2012: Facebook and underwriters meet to discuss and confirm optimistic financial projections for 2012.
- May 7, 2012: Facebook’s road show kicks off in New York. Zuckerberg re-affirms that Q1 was due to the seasonal trends and re-affirms optimistic guidance with investors and underwriters.
- May 7-9, 2012: After internal Facebook data shows meeting its Q2 and full year 2012 financial projections is all but impossible, Facebook guides its lead underwriters to lower their internal projections. Morgan Stanley, Goldman Sachs, and J.P. Morgan's Internet analysts cut their revenue forecasts, while the firms simultaneously and aggressively pitch the IPO to investors.
- May, 9 2012: Facebook's underwriting team offers a bare minimum disclosure and amends the S-1 stating simply that daily active users are increasing at a faster rate than deliverable ads due to mobile and potentially decreasing revenues. On May 9, PrivCo forewarned that this statement signified a weaker than predicted Q2.
- May 9, 2012: Underwriters contact select top institutional client to inform them of their weaker Q2 revenue forecasts for Facebook, but do not share the material insider information with other institutional or individual IPO investors.
- May 15, 2012: Morgan Stanley and underwriters raise Facebook’s price range to $34-$38.
- May 15-16, 2012: Underwriters encourage institutional and retail investors to request more shares than they may want. Investors are told that the demand for Facebook IPO shares is so robust that they will only receive a fraction of their allocation requests and should "put in for more than they want" to obtain their desired allocation of IPO shares.
- May 16, 2012: Privy to knowledge of Facebook’s weaker than expected revenues, Facebook insiders offer 83.8 million more Facebook shares. One of the lead underwriters, Goldman Sachs, encourages their private equity arm - which had invested in Facebook in 2011 - to double their shares offered for sale in the IPO.
- May 16, 2012: Underwriters - including those serving small investors such as eTrade - tell individuals that maximum allocations to small investors have been increased from just 500 shares per person to 5,000 shares, due to a "new supply" of Facebook shares made available by selling insiders.
- May 17, 2012: Morgan Stanley and underwriters price Facebook at $38 – the top of its range. Most investors are neither aware that Facebook will miss financial forecasts previously provided to them by underwriters, nor that a select few clients had been forewarned.
- May 18, 2012: Investors receive full or nearly full allocations unexpectedly, as even retail investor caps were raised from 500 to 5,000 per investor. The over-allocation requires investors to sell excess shares during Friday's open of trades. Retail and many institutional investors had not received warning regarding the weaker forecasts.
- May 18, 2012: Facebook stock opens for trading and plunges as informed institutions dump FB holdings and make no further purchases. Retail investors and most institutions receive more FB than they want (per the IPO norm, most investors request more than they want).
- May 18, 2012: Facebook stock plunges and Morgan Stanley steps in with an artificial support bid at $38. Morgan Stanley’s stabilizing bid avoids IPO embarrassment and tries to ensure a green shoe with its additional fees for underwriters.
- May 21-22, 2012: Facebook stock continues to plunge, as Morgan Stanely is unwilling and unable to spend further funds artificially propping up the stock price; Facebook stock closes at $31.00, a 26.3% drop from its $42.05 open.
- May 22, 2012: News first surfaces that select institutions were warned in advance of Facebook’s lower financial guidance, and that based on access to information from Facebook management, the lead underwriters' own research analysis had lowered Facebook's financial forecasts for Q2 and full year 2012.
- May 22, 2012: Retail and certain institutional investors begin to complain publicly that they were not warned by underwriters of any new weaker financial proejctions, other than those originally provided to them as they made their investment decisions.
- May 22, 2012: The SEC Commissioner says Facebook’s IPO irregularities merit further investigation:
“There are issues that we need to look at specifically with respect to Facebook.” – Mary Schapiro, SEC Chairwoman, in a statement on May 22, 2012
- May 22, 2012: Massachusetts issues a subpoena on Morgan Stanley:
“In connection with the discussions by their analysts with certain institutional investors about the revenue prospects for Facebook prior to that company’s initial public offering.” - a spokesperson for the Massachusetts Secretary of Commonwealth in a statement on May 22, 2012
- May 22, 2012: Morgan Stanley issues a statement which raises more questions regarding their IPO practices:
“Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs. In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the IPO.” - Pen Pendleton, Morgan Stanley spokesman, in a statement on May 22, 2012
“The implications of Morgan Stanley and underwriters’ selectively sharing material information regarding Facebook’s IPO with a few privileged institutional investors are huge. This story is just beginning and its dark regulatory cloud will hover over the IPO market for the foreseeable future,” said PrivCo CEO and Founder Sam Hamadeh in a statement.
Hamadeh added, “These moves basically destroy any remaining confidence of retail investors on fairness of the IPO process. The window is effectively shut on retail internet IPOs – including upcoming expected IPOs from consumer Internet names such as Kayak.com, Spotify and Rovio, all of which are now at risk. With no 'retail investor put' provided by small investors willing to buy regardless of valuation, institutions will not risk buying into these companies’ absurd valuations without a ‘greater retail fool’ to flip the stock to quickly. What we are hearing now is the sound of the IPO window closing in the near-term, harmed by the badly mishandled Facebook IPO, with the adverse effects to be felt by well deserving private companies for months if not years.”