Insight: Morgan Stanley cut Facebook estimates just before IPO
(Reuters) - In the run-up to Facebook's $16 billion IPO, Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered some negative news to major clients: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.
Context & Ripple Effects
Facebook entered the offering amid weaker-than-expected investor demand, after earlier coverage tied a possible delay to a broader drop in new tech stocks. Morgan Stanley's revised revenue view matters because the lead underwriter was communicating a less optimistic operating outlook to major clients during that already-fragile valuation process.
First-order effects
- Major Morgan Stanley clients received lower Facebook revenue assumptions, giving them a materially different basis for judging the shares than investors who did not receive the revision.
- Facebook's post-offering valuation debate becomes tied not only to demand, but also to the underwriter's late change in its internal outlook.
Second-order effects
- The disclosure sharpens scrutiny of Morgan Stanley's dual role as lead underwriter and adviser to institutional clients, raising the reputational cost of unevenly distributed research changes.
- Other banks handling technology offerings face pressure to make forecast revisions and client communications more consistent during the pricing process.
Third-order effects
- If high-profile offerings repeatedly pair weak demand with selective dissemination of changed estimates, investor confidence in IPO price discovery shifts toward greater emphasis on disclosure practices rather than underwriter reputation alone.
The trend: The Facebook offering is a test of whether technology IPOs can sustain public-market trust when underwriting, analyst forecasts, and institutional access overlap.