Facebook IPO Concern Grows as Morgan Stanley Defends Role

Facebook Inc. (FB)’s initial public offering is getting less friendly with each passing day.

Investors and regulators raised new concerns about the $16 billion IPO after shares fell a second straight day yesterday, extending losses to 18 percent below the $38 offer price.

Morgan Stanley, the lead underwriter, released a statement defending its handling of the May 17 IPO after the Massachusetts securities division yesterday subpoenaed the investment bank over its communications with clients. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and buyers of the stock have sued Facebook, Nasdaq OMX Group Inc. and the underwriters over the sale.

The anticipation that preceded history’s biggest technology IPO has been replaced by investor ire, including about whether the offer was priced too high.

“Rather than anything illegal or untoward, the valuation was the truly unfathomable part of what’s causing this frenzy,” said Michael Holland, chairman of Holland & Co., a New York-based investment company that oversees more than $4 billion.

Facebook increased the number of shares being sold in the IPO by 25 percent last week to 421.2 million and raised its asking price to a range of $34 to $38 from $28 to $35. The shares closed yesterday at $31 in the U.S. and added 3.2 percent to $32 at the close today in New York.

Decision Making

Chief Financial Officer David Ebersman was the point person on the deal, while Chief Executive Officer Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg weighed in on major decisions, said people with knowledge of the matter, who declined to be identified because the process was private. Dan Simkowitz, Morgan Stanley’s chairman of global capital markets, was one of the main bankers. Michael Grimes, global co-head of technology investment banking, also played a key role.

Morgan Stanley, already taking heat for helping price the IPO, received more scrutiny yesterday. The company may face regulatory review over claims an analyst shared negative news about Facebook with institutional investors before the IPO, said Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, the industry watchdog.

Morgan Stanley (MS) analysts reduced their 2012 Facebook profit projection to 48 cents a share from 51 cents days before boosting the price range on the IPO, according to people familiar with the matter, who asked not to be identified because the process is private.

Figures by Phone

The analysts also cut their 2013 profit projection to 83 cents a share from 88 cents, the people said. Investors received the new figures by phone as underwriters weren’t permitted to print anything about Facebook during the marketing period, the people said.

Those communications may be a “matter of regulatory concern” to both Finra and the SEC, Ketchum wrote in an e-mail. He wouldn’t say whether the agency is probing Morgan Stanley.

William F. Galvin, Massachusetts’ secretary of the commonwealth, said separately that his securities division subpoenaed Morgan Stanley to learn more about talks between Scott Devitt, the research analyst, and the firm’s institutional investors about Facebook’s revenue.

Market Confidence

“There is a lot of reason to have confidence in our markets and the integrity of how they operate, but there are issues we need to look at specifically with regard to Facebook,” SEC Chairwoman Mary Schapiro told reporters in Washington today.

The U.S. Senate’s banking committee is also reviewing the IPO, Sean Oblack, a committee spokesman, said today. The committee, led by Senator Tim Johnson, a South Dakota Democrat, will have staff-level briefings with Facebook, regulators and other stakeholders.

Photographer: David Paul Morris/Bloomberg

The anticipation that preceded history’s biggest technology IPO has been replaced by investor ire, including about whether the offer was priced too high. Close

The anticipation that preceded history’s biggest technology IPO has been replaced by... Read More

Close
Open
Photographer: David Paul Morris/Bloomberg

The anticipation that preceded history’s biggest technology IPO has been replaced by investor ire, including about whether the offer was priced too high.

The New York-based investment bank said its procedures complied with all regulations. “Morgan Stanley followed the same procedures for the Facebook offering that it follows for all IPOs,” Pen Pendleton, a spokesman, wrote in an e-mail.

The bank said it sent a copy of a revised prospectus that Facebook filed May 9 to all of its institutional and retail investors. The filing disclosed that Facebook’s advertising growth hasn’t kept pace with the increase in users.

Pendleton said many analysts in the syndicate reduced their earnings estimates to reflect that information, and that those revised views were reflected in the pricing of the IPO.

Nasdaq Problems

Bloomberg News, citing two people with knowledge of the matter, was first to report on May 10 that Facebook was telling analysts sales may not meet their most optimistic projections.

The IPO was marred on its first trading day when Nasdaq’s platform was overwhelmed by order cancellations and updates that made the stock-market operator unable to finish the auction required to open. The SEC said it will review the trading.

Knight Capital Group Inc. estimated that it lost about $30 million to $35 million trading Facebook because of technical problems. Knight, a brokerage based in Jersey City, New Jersey, made the disclosure in a filing today with the Securities and Exchange Commission.

Investors filed suit in Manhattan federal court today against Facebook, Zuckerberg, and bankers including Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co., accusing them of misleading them about the company’s financial prospects.

Investor Discontent

The underwriters made about $100 million through their work to stabilize public trading of the shares, said a person familiar with the matter. The gains will be shared by all IPO syndicate banks, said the person, who declined to be identified because the process was private. Morgan Stanley will use some of the gains to reimburse clients who lost money because of glitches in trade execution, the person said.

Phillip Goldberg, a Maryland investor, sued Nasdaq yesterday, claiming that the stock exchange “badly mishandled” Facebook trading, failing to cancel orders when requested by customers. In a complaint filed in federal court in Manhattan, Goldberg said that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab Corp. account the morning after the May 17 IPO.

Goldberg is seeking to represent a class of investors who lost money because their buy, sell or cancellation orders for Facebook weren’t properly processed, according to the filing.

Robert Madden, a spokesman for Nasdaq, didn’t immediately return a call seeking comment on the suit.

‘Accentuated the Magnitude’

Nasdaq CEO Robert Greifeld said on May 20 that the opening delay “had no apparent impact on the stock price,” noting the share decline began after all brokers had received confirmation about their trades in the opening auction. Ashley Zandy, a spokeswoman for Facebook, the world’s biggest social network, declined to comment.

Investors looking for a fall guy will have a tough time, said Daniel Genter, who oversees about $3.9 billion as president of RNC Genter Capital Management in Los Angeles.

“Because of the expanded offering and price, everything had to go right,” Genter said. “The fact is, everything didn’t go right. That’s just accentuated the magnitude of the damage.”

To contact the reporters on this story: Lee Spears in New York at lspears3@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: Katherine Snyder at ksnyder@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.