
Facebook Bankers Secretly Cut FB Revenue Estimates In Middle Of IPO Roadshow - larrys
http://finance.yahoo.com/blogs/daily-ticker/facebook-bankers-secretly-cut-facebook-revenue-estimates-middle-133648905.html
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JumpCrisscross
The original Reuters article does a better job explaining this than the link-
bait title here: <http://www.reuters.com/assets/print?aid=USBRE84L06920120522>

FB amended their S-1 to lower revenue forecasts. Following that, a research
analyst at Morgan Stanley cut his revenue forecast on FB close to their IPO.
Nothing here should fire anyone up.

Equity research must be conducted independently of the investment bankers'
non-public information. Given that they are opinions assembled from public
data I don't see how disclosing it only to clients is a problem. If you want
to publish a newsletter with stock tips and only disclose it to paying clients
that is your prerogative, too.

~~~
cube13
>A research analyst at Morgan Stanley cut his revenue forecast on FB close to
their IPO. Following that, FB amended their S-1 to lower revenue forecasts.
The latter may have been informed by the former but it cannot be said that the
former was influenced by the latter without more information.

It was the opposite. Facebook filed the amended S-1, and Morgan Stanley,
JPMorgan Chase, and Goldman Sachs changed their forecast.

From the Reuters article:

>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.

~~~
tomgallard
So Facebook expressed caution about revenue growth, and the banks downgraded
their earnings forecast?

I really don't see what the story is here!

In fact the WSJ suggests that if they had released these revised earnings
forecasts publicly, they'd have been breaking SEC regulations:

 _Underwriters are barred by Securities and Exchange Commission rules from
publicly issuing research on the IPOs they are involved in. But analysts are
allowed to discuss their views with clients during these so-called road
shows._

~~~
malandrew
AFAIK, in the US, this doesn't prevent the Broker Dealer arms of the bank from
publishing reports for an IPO underwritten by the Investment Banking arm of
the bank. I know it doesn't in Brazil. There should be a Chinese Wall between
the IB and the Broker Dealer and no meeting should happen between analysts
from both arms without the presence of compliance. However, this is often not
observed and difficult to enforce since members of both banking arms are often
friends and socialize together.

------
guelo
It is not possible to trust Wall Street, the whole thing is built on insider
trading. They call customers that are not on the inside "dumb money" and
unashamedly try to figure out how to take their money.

~~~
vijayr
Is it this bad in Europe and Asia? or just in the US? Almost every day we hear
banks doing this, banks doing that - most of it is unethical, and many of it
probably illegal, yet nothing seems to be happening to them. This is
depressing.

~~~
spydum
Ethics and legality don't always align. You will always find people who are
willing to push the ethical line a bit further out to satisfy their greed.
Then of course, it's not too much further to meander across that legal line as
well.

What can government/regulators do? If they respond harshly and abruptly, they
are criticized as being too heavy handed, and enemies of capitalism. If they
respond slowly and deliberately, they are called slow and ineffective.

~~~
Drbble
Paraphrasing: If government does the right thing, criminals hate them, and if
they do the wrong thing, victims hate them.

What can they do, indeed?

------
chernevik
The bankers surely know how disastrous something like this would be. Facebook
has been aggressively indifferent to this whole process, which involves a lot
of complexity both in decision making and communication. "Don't make the
analysts look bad" is an important rule, but one that's easy to miss unless
you spend some time thinking through your communications with the market.

If FB's initial analyst communications emphasized optimism over credibility
and deliverability, or FB was impatient with questions casting doubt, the
analysts may have had reason to start with high estimates. The May 9 filing
comes out and reveals those to be implausible, and they have to dial back to
avoid looking silly or as if they're pumping the stock.

If FB management hadn't spent a lot of time thinking about the relationships
between the analysts and the investors, they may have missed the point that
those investors are the analysts' ultimate clients. If they didn't spend much
time with the analysts, they may have neglected building relationships where
they could subtly signal issues without tripping regulatory problems.

Or the analysts were idiots and screwed up the biggest assignments of their
lives.

Is all this shady company / banker / investor communication good? No, but this
is how it's done right now, and if you want your partners to do well you have
to work within the rules of the road. It isn't clear to me that Facebook took
the time to do that.

~~~
lmm
Does facebook actually lose anything? It sounds like they walked away with the
maximum amount of money possible; the bankers might be upset, and I can see
that might make it harder for facebook to raise money in the future, but
they're unlikely to need to for a while yet.

~~~
tatsuke95
Every employee who is locked into their shares for 6 months is losing money
every day.

~~~
Drbble
Find me one employee who would feel ripped off that their 5000, 10000, or
100000 sell at even $20 instead of some hypothetical number could have been
achieved by better hypothetical management. Oh those poor people, should have
taken the offer to work at _____ instead?

~~~
tatsuke95
It's pretty easy to be on the outside and say, "Oh, boo-hoo, they're still
millionaires", but it's a different story when it's your own wealth. I assure
you I could find people around the world who would say the same about _your_
earnings.

Anyway, the point was that the stock diving isn't victimless. There are real
people losing real wealth.

Edit:
[http://www.reddit.com/r/finance/comments/u0om7/im_an_employe...](http://www.reddit.com/r/finance/comments/u0om7/im_an_employee_at_zynga_and_own_a_decent_amount/)

------
tomgallard
I'm a bit confused about this. I distinctly remember the news about the
earnings warning (due to difficulty of monetizing mobile users) coming out
before the IPO. So there can be no complaint there.

The article suggests that the problem is that the banks underwriting the IPO
cut their own estimates for Facebook's earnings based on this warning, and
then didn't share it with the general public.

Surely this is nothing out of the ordinary- lots of banks/brokers/financial
institutions produce research/notes on shares which are only distributed to
major clients.

~~~
mrcapers
exactly. the biggest issue is the suspicion of FB giving more material,
informational color on rev. growth to the analyst(s) than to the public.

------
larrys
And the domain "facebooksuit.com" was just registered:

Domain Name: FACEBOOKSUIT.COM

    
    
       Registrar: GODADDY.COM, LLC
    
       Whois Server: whois.godaddy.com
    
       Referral URL: http://registrar.godaddy.com
    
       Name Server: NS05.DOMAINCONTROL.COM
    
       Name Server: NS06.DOMAINCONTROL.COM
    
       Status: clientDeleteProhibited
    
       Status: clientRenewProhibited
    
       Status: clientTransferProhibited
    
       Status: clientUpdateProhibited
    
       Updated Date: 22-may-2012
    
       Creation Date: 22-may-2012
    
       Expiration Date: 22-may-2014

~~~
drsintoma
godaddy? really?

~~~
jgroome
Problem? They're cheap and easy. I imagine you're disappointed because they're
not too highly regarded in the tech industry, but honestly you shouldn't
expect your personal political beliefs to be held by everybody else.

~~~
drsintoma
They might be cheap, but they are far from easy, I would actually qualify it
as the most painful purchase process I've ever experienced (my former employer
had domains there). And my political beliefs had nothing to do here,
technological beliefs at most.

Anyway, Godaddy is where I would expect my father to buy a domain, not someone
at HN. Hence my surprise. But turns out the op didn't register the domain
himself, he was just pointing it out.

------
Irishsteve
Facebook : The biggest tech IPO ever. Also possibly the most controversial
tech IPO ever. It's down another 3% (On top of 10%). Irregularities popping
out left right and centre. Not to mention companies being very public about
discontinuing advertising with them.

Someone hates Facebook.

------
Centigonal
"The SEC should investigate this immediately."

Ha, funny!

~~~
goatforce5
The author of the article, Henry Blodget, was investigated and fined and
banned from working in the finance industry by the SEC.

<http://en.wikipedia.org/wiki/Henry_Blodget>

He probably doesn't agree with the prevailing (?) wisdom that the SEC is
toothless.

~~~
Centigonal
Oh, wow. I was not aware of that. Thanks!

------
sparknlaunch12
No surprises here. I always cringe when I see 'mum and dad' flotations. These
type of deals are always plagued with bias, mostly in the favour of the big
guys.

The poor retail investors get sucked in by the allure of holding a brand name
or having boasting rights. This thinking is dangerous when making an
investment. I doubt most people would throw $1000 on a sports bet but quite
happily to throw in more on buying a 'big name'.

~~~
Drbble
Some people read the sports pages, some people read the business pages, but
they are reading the same paper and they aren't so different from each other.

------
thereason
I'm loving this sequence of events just for opportunity to see the cognitive
dissonance of some HN commenters in action.

The FB IPO strategy was to wait for the peak (or "plateau", if you prefer) in
their growth, collect money from the public and then, for the insiders,
quickly cash out.

As for why they wanted to collect money from the public through an IPO, we can
call it greed, but truthfully it was also the logical thing to do for the
company. They knew were not going to grow revenues any further from the
Facebook "business model". Revenues would slowly decline going forward. The
novelty factor would disappear and advertisers would learn. But with an IPO
they could bring in many years worth of revenue, by selling worthless shares
to gullible investors, and extend the life of "Facebook Corporation". As long
as Facebook has cash, they can stay "in the game". Like Microsoft, they do not
need to innovate, they can just acquire or copy new players as they come
along. They just sit and wait for the competition to arise, then quickly snuff
it out, with cash.

New ideas and innovation are what can kill a company like Facebook (or Yahoo,
or Microsoft, or so many others). The way you stay in the game is by having
the cash to purchase the work of the innovators who would otherwise render
your business obsolete.

~~~
tatsuke95
I can't help but be disturbed that you've lumped Microsoft in with Facebook
and Yahoo...twice.

Microsoft is one of the biggest companies in the world, makes a wide variety
of products, both _physical_ and digital, did $17BB in revenue in the first
quarter of 2012, and has been a public company for over 25 years, returning
massive value to its investors.

So what do they have in common?

~~~
jacquesm
That new ideas and innovation can kill them.

Likely in the case of microsoft it will cause them to change, along the lines
of how microsoft forced IBM to change.

~~~
tatsuke95
> _"That new ideas and innovation can kill them."_

What company on the planet does this not apply to?

------
maybird
I really don't want to mentally lump Facebook with Groupon. I hope we hear an
official statement about this from Facebook.

~~~
samstave
It is a safe bet to group them. Given that we know that zynga constitutes 12%
of their revenue, and zynga is useless - unless they charge for privacy, or
other features - social networks will always simply be an ad platform and
that, while still profitable, is not something eternally sustainable.

~~~
Drbble
Google makes good money as an ad platform.

------
mikeryan
So if I'm getting the timing right, in the week leading up to the IPO, they
were just about simultaneously dropping their revenue forecasts while boosting
the initial offer price?

This whole thing just leaves me with a bad taste in my mouth.

~~~
JumpCrisscross
There is no singular "they". The equity research analyst, noting the S-1/A
revenue forecast amendments by FB, downgraded the stock. The bankers, noting
that the issue was 25 times oversubscribed _in Asia alone_ , saw demand
outstripping supply.

May the bankers have gotten overzealous? Yes, probably. But we're saying this
with the benefit of hindsight. Remember that Morgan Stanley walked into this
deal still burning from LNKD popping 90% on its IPO - after the underwriting
syndicate had _already_ raised the price by 30% on strong demand [1].

[1]
[http://articles.businessinsider.com/2011-05-19/tech/30001969...](http://articles.businessinsider.com/2011-05-19/tech/30001969_1_linkedin-
ipo-ipo-price-morgan-stanley)

------
tbundy
Not saying it's not true, but would be nice if there was more than an
anonymous source to back this up. Unless I missed something.

~~~
freehunter
Yahoo says that Reuters has the information. Reuters says the information was
delivered by Scott Devitt, Internet analyst for JP Morgan. Scott Sweet, senior
managing partner at the research firm IPO Boutique, backed up the story. It
was also confirmed by "an official with a hedge fund firm who received a call
from Morgan Stanley about the revision."

[http://www.reuters.com/article/2012/05/22/us-facebook-
foreca...](http://www.reuters.com/article/2012/05/22/us-facebook-forecasts-
idUSBRE84L06920120522)

~~~
tbundy
Ah, I hadn't seen the Scott Sweet quote. Thanks.

------
mratzloff
Possible securities fraud? I predict no one is punished and bonuses all
around!

------
rorrr
At current P/E of 104 and earnings per share of $0.31, this stock can only go
down. There's no reasonable justification that FB will start making 5X money
any time soon.

Current fair price: $6

------
horsehead
I can't help but feel Facebook is on the way out. Probably not any time soon.
But there is just a huge movement of people waiting for a good reason to
leave. Perhaps the debacle that was the company's IPO will start the chain
reaction that will end in Facebook going the way of MySpace, et al.

