Related: Zuckerberg, banks sued over Facebook IPO
As institutional investors worked to digest the developments, Morgan Stanley tried to set the price and size of the stock offering, The New York Times reported, noting that, while some big institutions scaled back on their plans, others placed large orders and retail investors clamored to buy shares of the tech icon.
Eventually, Facebook and Morgan Stanley decided there was enough demand and interest in the IPO to justify an offering price of $38 a share, even as other bankers involved in the deal pushed back, concerned about the company’s growth prospects, particularly in the mobile space, the Times reported.
Facebook’s Chief Financial Officer David Ebersman, who worked closely on every aspect of the IPO with Morgan Stanley’s co-head of global technology banking Michael Grimes, was instrumental in deciding to increase the number of shares Facebook would offer in the IPO by 25 percent, according to The Wall Street Journal.
In the end, given the muted reception to the IPO, the $38 a share offering price -- and the increased allocation of shares -- may have neutralized any first-day price jumps, which are seen by Wall Street banks as the trademark of a successful IPO.
“They misjudged what the real demand was,” Quinten Stevens, chief investment officer at Stevens Asset Management, told CNBC, referring to the underwriting banks on the deal.
Stevens noted that, given the hype surrounding the IPO and the fact that the offering was so heavily oversubscribed, it would have been very difficult to accurately gauge demand from investors. Once an IPO loses momentum in the first hours and days of trading, it “turns to the downside and becomes a busted IPO,” he added.
Anindya Ghose, an associate professor at NYU’s Stern School of Business, reckons the bankers pricing the deal overestimated the company’s projected revenue growth rate. With a more modest outlook for future revenue growth, he reckons Facebook shares would be worth a price “in the mid to upper 20s” -- closer to the first estimate of $28 the company gave investors.
Indeed, a handful of Wall Street estimates analyzed and modeled by Thomson Reuters StarMine finds that Facebook would be more fairly priced at just below $10. The analysis projects an annualized earnings growth over the next 10 years of 10.8 percent, almost exactly the mean for the technology sector and far below the 24 percent growth rate implied by the current stock price.
Related: Still hope for Facebook, despite poor start
“Investors are looking for much more growth than the analysts covering the company,” said Greg Harrison, corporate earnings research analyst at Thomson Reuters.
Worries about Facebook’s growth prospects emerged in early May when the company disclosed potential challenges in a regulatory filing. Of greatest concern was the increasing use of Facebook on mobile devices -- a realm where the company is not making much money from ads.
Top financial regulators said on Tuesday the issues around the Facebook IPO should be reviewed. One area of concern, according to reports, could be the disclosure of lower growth forecasts to certain big institutional investors, which may leave both Facebook and Morgan Stanley open to accusations of selective disclosure.
“I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook,” Securities and Exchange Commission Chairman Mary Schapiro told reporters Tuesday as she exited a Senate Banking Committee hearing.
The SEC is also investigating setbacks following a technology glitch on the Nasdaq exchange.
Meanwhile, Massachusetts state securities regulators have already issued a subpoena to Morgan Stanley seeking information about its analysts' discussions with investors about Facebook.
Reuters contributed to this report.
Shayndi Raice, The Wall Street Journal, weighs in on the Facebook IPO debacle.
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