Did Facebook Ruin its Own IPO?

Morgan Stanley (NYSE:MS), the main underwriter for Facebook’s (NASDAQ:FB) IPO, has been reported to have cut its client’s revenue forecasts just before the public launch of the stock, leading to investor uncertainty. Now sources say it was in fact the social network’s management that wanted to scale down the figures.

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Facebook asked analysts to cut estimates after getting feedback during its investor roadshow, where it reportedly heard concerns that users’ growing shift to mobile devices would force a new advertising strategy. “Facebook backed off and said, ‘Hey get your models down,’” a source told Reuters.

After reports that Morgan Stanley and other underwriters told some of their major clients that they were cutting forecasts for Facebook’s second-quarter and full-year revenue, the bank has come out to say that it followed standard procedures during the IPO and did no wrong.

“These procedures are in compliance with all applicable regulations,” Morgan Stanley spokesman Pen Pendleton said in a statement. “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,” the statement added.

Facebook’s IPO is under review by federal regulators after the stock stayed flat on the opening day of trading on Friday, fell 11 percent on Monday, and closed 8.9 percent lower on Tuesday. At $31 at close of trading on Tuesday, it was way below its $38 per share offering price.

Reports say Facebook’s advice to its underwriters came around the same time as it published an amended prospectus that also included a note about lower revenue. Morgan Stanley said the revised prospectus was given to all retail and institutional investors, but everyone didn’t receive the new earnings forecasts. Regulators are also investigating whether important information was not made available to all investors.

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