Probably not surprising to most of you, big banks, and underwriters of the Facebook IPO deal, had inside information on the company's inevitably shrinking revenues before trading even began. As we reported yesterday, Morgan Stanley's financial forecasters issued a revised report early last week detailing an over 6% decline in revenue for the second quarter of 2012. The revisions stems from an update Facebook made to SEC S-1 documents stating a threat to financial health form the large population of users switching to mobile.
Essentially once a Facebook user switches to mobile usage, they view less ads, thereby rendering current advertising efforts less efficient and less effective. Facebook did the appropriate thing. They listed the threat in their financial report and immediately began the arduous process of addressing their shortcomings in the mobile user category. Any healthy confident organization would have handled the situation the same way; they would view it as a challenge and an opportunity for growth.
Anyway, back to the revised reports from the big banks involved. Apparently nothing official went out, but Morgan Stanley, Goldman Sachs, Bank of America, and JP MOrgan executives were all briefed about the revised forecasts through conference calls and personal conversations long before IPO trading even kicked off. Of course, now the Securities Division of the Massachusetts Commonwealth has subpoenaed the documents and wants to know a lot more about the scenario, and so do the rest of us.
Take a look at the revised full-year revenue forecasts for the big banks involved:
Morgan Stanley -- $4.854 bln (new)from $5.036 bln (old)
Bank of America -- $4.815 bln (new) from $5.040 bln (old)
JPMorgan -- $4.839 bln (new) from $5.044 bln (old)
Goldman Sachs -- $4.852 bln (new) from $5.169 bln (old)
Lowered estimates for second-quarter 2012
Morgan Stanley -- $1.111 bln (new) from $1.175 bln (old)
Bank of America -- $1.100 bln (new) from $1.166 bln (old)
JPMorgan -- $1.096 bln (new) from $1.182 bln (old)
Goldman Sachs -- $1.125 bln (new) from $ 1.207 bln (old)
Lowered 2013 Earnings per share estimate
Morgan Stanley -- 83 cents (new) from 88 cents
Bank of America -- 64 cents (new) from 66 cents
JPMorgan -- 66 cents (new) from 70 cents
Goldman Sachs -- 63 cents (new) from 68 cents
According to Reuters, executives had these numbers by May 10th, a full week before the Facebook IPO even launched. Yet there we were just days before the IPO seeing millions more shares being released and the price growing almost $10 per share from what the original estimations were. So I can only conclude that the response to decreased revenue forecasts was to jack up the price and offer more shares. Seems counterintuitive to me, but I'm no Wall Street guru. I just figure, if I know somethings going to be worth less, I can't, in good conscience, really justify charging the public more.
My conscience aside, it doesn't seem on the up and up to the SEC so they are getting involved, and my guess is, they will be going through the whole Facebook IPO with a fine-toothed comb. We'll see. Check back for new news as the story unfolds.