Facebook Bankers Secretly Cut FB Revenue Estimates In Middle Of IPO Roadshow | Hacker News Reader

Facebook Bankers Secretly Cut FB Revenue Estimates In Middle Of IPO Roadshow

finance.yahoo.com

217 pointslarrys88 comments

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.

>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.

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.

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.

Woops...updated

(This thread would be easier to follow if you'd mention 'edited' somewhere.)

> link-bait title

Oh FFS. Anything from Henry Blodget should immediately be ignored or delinked.

The man bilked all sorts of money from widows and orphans (in the form of pensions and mutual funds). Most normal people would want to make amends before showing their face in public, let alone the way he punches up stories.

I can't believe I fell for it too.

Edit: More sensibly written article in WSJ here - http://online.wsj.com/article/SB1000142405270230401940457741...

Another posted linked to Wikipedia

http://news.ycombinator.com/item?id=4008313

"Henry Blodget (born 1966) is an American former equity research analyst, currently banned from the securities industry"

en.wikipedia.org/wiki/Henry_Blodget

This gives some good color to who's running Business Insider.

Business insiders.

Dangerous assumption. The title might only be a clever ruse. Personally I suspect it is a shadowy cabal of part time gooseberry farmers.

There is no doubt.

If Blodget really bilked money from widows and orphans (and I don't doubt it) how come he's not running a bank? Seems like the perfect item for the resume.

Maybe he's just pissed-off because he was the sacrificial lamb for a lot of other widow-and-orphan-bilkers and wants to make his amends by bringing his old friends to some sort of reckoning?

What in particular in your linked article contradicts the original article?

1) The estimates were changed in mid run-up - check

2) This was considered unusual - check (your article, not Henry Blodget, has the screaming caps "very unusual" in it).

3) This may have contributed to Facebook's less than stellar performance - check

4) The estimates were disseminated only to large clients - not confirmed or contradicted, so the Blodget, for better or worse, is saying more than your link.

So, the problem is ????

The OP says this is something "buyers deserve to be outraged about". It also insinuates "news of the estimate cut", implying the S1/A, was selectively distributed when it was only the research that was.

Then there is the title and speculation that there were "nods and winks" between the underwriters and equity analysts. I read the S1/A when it came out and came to the same qualitative conclusion (FB guides forecast down -> lower value on stock isn't exactly groundbreaking causation).

Blodget says more than the Reuters wire. The surplus is speculation blended in smoothly with the facts.

The problem is there were no revenue forecasts in the S-1. And the subtle change in the S-1 language wasn't an adequate basis for all the analysts to revise their revenue forecasts.

The analysts discussed their own forecasts with Facebook and the result of the discussion was that they lowered their numbers. Companies subtly make their discomfort known if analysts put out numbers they don't think they can beat. See http://dealbook.nytimes.com/2012/05/22/facebook-i-p-o-raises...

And, since the forecast changes were made with Facebook's implicit approval or at least without Facebook's objection, clients who received those updated forecasts got information from Facebook which was not available to the public in the S-1, or elsewhere.

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.

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.

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.

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?

I assure you European banks are just as corrupt as American banks.

Insider trading (and the wider 'market abuse') can be extremely difficult to prove. The FSA fines a handful of people each year, and prosecutes even fewer.

If firms chose not to trade, when they otherwise would have done (which seems to be the case here), based on insider information, that is nigh on impossible to prove.

The agencies who investigate what you describe are understaffed and underfunded, many say intentionally.

> It is not possible to trust Wall Street, the whole thing is built on insider trading.

As the old saying goes: If you don't know who the sucker at the table is, it's you.

And sometimes it is still you, even when you think you know otherwise.

Depends on the intelligence of the person and the complexity of the ruse. The most powerful deceptions are those just under our noses.

It's not just Wall Street though. Wasn't it John Doerr that said, "No conflict, no interest"

The "market" is usually caveat emptor - the buyer has to take into consideration how much they trust the seller. On top of that, society has some laws against fraud that make lying more harmful to the seller. That means the buyer can have some amount of faith in the seller. For publicly traded companies, this goes a lot further. The SEC is supposed to create an environment with reasonable auditing and pretty harsh penalties for lying. This is supposed to facilitate a huge amount of business, since all the businesses can trust each other a lot more (when the stakes would otherwise be high enough to attempt fraud). So really the only thing preventing fraud at that scale is the SEC, and if it's compromised in any way, we're kinda doomed.

I was with you right up to the "if"

http://www.rollingstone.com/politics/news/is-the-sec-coverin...

I read an article a few years ago that correlated the desirability to do business in a country with the perceived likelihood of fairness and low corruption in institutions and government. The US was high (possibly first?) in that ranking.

I wonder at what point that starts to change for us?

That may have been something out of the World Bank, the Doing Business team. Sadly the low corruption high fairness perception times are long past - the likes of NZ and Scandinavian countries now dominate the lists. However the US is still the biggest economy, so will continue to attract huge investment. The big alternatives are not scoring highly in low corruption and fairness either.

This is a silly viewpoint. It is silly because it is disempowering; it is admitting defeat before even trying to learn how markets work. Yes, nearly all markets are massively manipulated by those with weight, with the Forex markets being one of the least manipulated because those who would like to manipulate them generally don't have the means to do so.

The important thing to realize is that markets, manipulated or not, are pain optimization machines. They move in ways that maximize psychological distress to to the greatest number of participants, and this happens for sound fundamental reasons based on human psychology, moment to moment supply and demand, and the way in which most people approach a trade-slash-investment. This is often expressed as "markets move because they have to, not because they want to" or "markets move to where the stops are and then reverse". They don't do it because of nefarious secret masters, they do it because that is the natural state of operation of a market.

I strongly recommend reading Mastering the Trade by John Carter - it's one of the best books out there to explain why markets act they way they do in a clear and easily understood way that makes sense to non-traders.

That is a pretty ignorant statement given that earning forecasts are always provided by the company and all Wall St. analysts do (independently from the underwriters) is check market assumptions, company's share of market, cost structure, etc.

Financial guidance, specially at the Net Income level, is ALWAYS the company's call. Who pushed for Facebook's $104bn valuation was current FB shareholders (Accel, DST, etc.), not the underwriters. Do not be that ignorant.

Absolutely. The concept of 'diversification' was fabricated to convince 'dumb money holders' to give up more cash. That's the sole purpose of diversification.

"You really need to diversify just a bit more. With as little as 50,000 dollars more, we can expose your portfolio to international rising growth stocks in Asia."

Are you being sarcastic? I genuinely can't tell.

That's the best kind.

For those that might be confused. Diversification is a genuinely useful tool for an investor. Since it is very hard to tell which stock is going to perform well you have to spread your bets. Interesting literature on how to do this dates back to the 1952 paper 'Portfolio Selection' by Markowitz[1].

[1]: http://en.wikipedia.org/wiki/Harry_Markowitz#Selected_public...

>"It is not possible to trust Wall Street, the whole thing is built on insider trading."

And guess where that insider trading starts? With the actual insiders. That is, the people inside the business.

People at Facebook shouldn't be absolved of blame.

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.

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.

Well such a mistake would it hurt their ability to communicate with the analysts and the markets. They'd have less credibility and would have a harder time explaining anything tricky. They may hear less about what investors do and don't think and what drives the stock's movements.

Over time those communication gaps can lead to more volatility in the stock and perhaps lower levels. That may not matter to Facebook until it needs capital. But it will matter to early investors and employees holding stock they'd like to liquidate. Some of those players may have such returns they don't care, but not all of them are so fortunate and in general it's a missed maximization.

How important all of that is depends on what FB wants to do and be.

More broadly, public markets are an important constituency, if those investors don't trust you that's going to influence your reputation in the media and with the government.

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

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?

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...

Not if what we're talking about is facebook getting a higher valuation than they "should" have. If facebook is "really" worth 90 billion, then the employees are going to get x% of 90 billion 6 months from now; that would still be true if the IPO valuation had been 80 billion rather than 100. No?

Was it really that shady?

From the Reuters article, it sounds like Facebook issued the updated SEC filing during the middle of their roadshow, and the analysts went over it and issued new forecasts to their paying customers.

Keep in mind that the underwriters are barred from making public forecasts during the lead up to an IPO.

Also keep in mind that the SEC filing was public, so anyone could go and read through it. So it's not like this was inside information. It was available to be consumed.

Estimates of underwriters' estimates are presumed to be indicative of management opinion. That's a touch shady to begin with, ideally the analysts shouldn't have any "extra" information in the first place, right? Given that a change in those estimates is interpreted as a change in management opinion -- if that change is communicated to one set of investors, the others are disadvantaged.

To me a lot of this falls within reasonable expectations of how openly subjective information can be communicated in the first place. Any communication involving judgment and ambiguity and anticipation is going to travel better and faster within some social network, and that's going to advantage some over others. I don't think the advantages are insurmountable, crowds are often wrong and anyone good at this stuff can find their way in. But I definitely see why other people find the whole thing fishy.

The facts were public. The analysis was not. Here's the information that the analysts were working off of:

http://www.sec.gov/Archives/edgar/data/1326801/0001193125122...

The facts were that Facebook had less profit for Q1 2012 than Q1 2011, despite making 25% more revenue. It was blamed on lack of new revenue from the mobile space.

The "disadvantage" is to people who were blindly buying Facebook without doing due diligence.

I'd be very surprised if the analysts didn't have sit-down meetings with FB staff and management.

How many investors do you think were reading every amendment to the S-1 up to May 9? Not even considering how many did not read the S-1 to begin with.

The use of the Greenshoe tactic to make the price appear stable also seems to suggest they were targeting naive investors who would only be watching the share price after trading began, having no regard for who was buying them.

Please tell me I'm wrong.

As for Henry Blodget, while he may be biased in favor of sensationalism to garner pageviews, he seems to be in a unique position to comment on this sort of maneuvering to manipulate naive "web investors". He was once in the center of it, during the first Bubble. We cannot say the same for the WSJ's writers.

Please tell me I'm wrong.

An investor who didn't read the s-1 was just wandering through a casino pulling slot machines without even reading the payout disclosures. There is right reason such an investor should profit. If that investor runs a fund for your capital, he should be fired.

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.

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.

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

godaddy? really?

For anyone interested the actual time registered was:

2012-05-22T14:52:09.0000Z

That's UTC time. So it was 10:52 EDT (NY Time).

This info is only available to registrars (I have no affiliation with godaddy but have access by way of another registrar to this and other info).

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.

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.

It'll be ironic when that domain owner is sued for trademark infringement.

Won't happen.

Lawsuit domains are common. He will sell it to a lawfirm doing a class action which is perfectly ok to do.

FWIW - FACEBOOKCLASSACTION.com was registered almost 4 years ago:

Domain Name: FACEBOOKCLASSACTION.COM

   Registrar: REGISTER.COM, INC.

   Whois Server: whois.register.com

   Referral URL: http://www.register.com

   Status: clientTransferProhibited
   Updated Date: 17-jun-2011

   Creation Date: 15-jul-2008

   Expiration Date: 15-jul-2012

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.

"The SEC should investigate this immediately."

Ha, funny!

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.

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

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'.

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.

Sports bets are binary win or lose propositions. You can mostly control the amount of money you are willing to lose on a stock bet.

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.

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?

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.

>"That new ideas and innovation can kill them."

What company on the planet does this not apply to?

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

I think it's one thing for the bank handling the IPO to cut revenue estimates and another thing to have to restate actual earnings because of a material weakness in your accounting practices.

Granted, this is a bit shady, but bankers are a bit shady. A company that is shady with their earnings is what would be really worrying.

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.

Google makes good money as an ad platform.

You don't need to.

Groupon's business model was ridiculous from the beginning, and they actively engaged in attempts to manipulate their earnings numbers.

Facebook's model is fundamentally unremarkable and quite similar to a number of other profitable companies. You can question the strategy and execution, but the general model is known to work. Here questions are being presented about how forecasts were handled in the run-up to the IPO. Based on what we know/suspect, the underwriters would necessarily be implicated in any actual wrongdoing, but there is thus far little evidence to suggest Facebook made any sort of Groupon-like manipulation or coverup attempt. It can and should be investigated, but we're a long way from torches and pitchforks on Zuckerberg's front lawn.

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.

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...

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.

Here's the Reuters report, which has more detail:

http://www.reuters.com/assets/print?aid=USBRE84L06920120522

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...

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

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

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

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.

Reply on news.ycombinator.com