But Herman had a script in Grimes' handwriting detailing Facebook's new second-quarter revenue estimates:
"I wanted to make sure you saw the disclosure we made in our amended filing. The upshot of this is that we believe we are going to come in the lower end of our $1.1 to $1.2 bn range for Q2 based upon the trends we described in the disclosure."
The script also showed that Herman had added Facebook's year-end estimates:
"Trend/headwinds over the next six to nine months as this run through the rest of the year, this could be 3 to 3 and a half percent off the 2012 $5 billion target."
Herman's first three calls were to the research desks of Morgan Stanley, JPMorgan, and Goldman Sachs, and after their conversations, all three banks cut their estimates of Facebook's annual revenue by between 3.01% and 3.33% -- perfectly aligned with Herman's notes, as the following charts from court documents show:
The news spread -- from research analysts to their preferred clients -- that Facebook was slashing revenue estimates in the middle of the roadshow. Morgan Stanley, JP Morgan, and Goldman Sachs had effectively sounded alarm bells on Wall Street. Even analysts who hadn't yet made a single call about Facebook's new figures were being inundated with questions. "Our clients were asking us to confirm what they had heard, so we had to tell them what we knew," said a research analyst at one of the other underwriting firms.
Many large investors sensed a rare opportunity: With its revenue projections falling at such a peculiar time, the conditions could be perfect to place a massive bet against Facebook stock.
VI: THE BET
A week before the IPO, confusion reigned in the financial press.
On May 11, Bloomberg reported that demand for Facebook's stock among institutional investors was much lower than expected. But on the same day, Reuters had a conflicting report: Facebook was already oversubscribed, and one large unnamed institutional investor was calling around syndicate desks trying to get more shares.
While retail investors clamored for Facebook shares, some large investors were planning a massive short -- essentially betting against the stock's buyers. Scott Sweet, senior managing partner of Tampa-based research firm IPO Boutique, received calls from hedge fund clients saying they heard from research analysts at underwriting banks that Facebook's mobile trend was behind its lowered earnings estimates. One multi-billion dollar hedge fund client told Sweet that he planned to short the stock as a result. (Sweet didn't name the investor due to a confidentiality agreement he has with clients.)
"The consensus among hedge funds on the West Coast was to short the stock on day one," said one institutional investor at a medium-sized hedge fund specializing in technology stocks. "The call we received from JP Morgan about earnings being lighter than expected gave us even more conviction in our short." Hedge fund analysts at his firm were receiving calls from their personal brokers days before the IPO, hawking an allegedly rare chance to get shares of Facebook stock. "That never happens," the hedge fund investor said. "Supply was definitely exceeding demand."
But despite the growing consensus among some large investors that Facebook was overpriced, on May 15, three days before Facebook's market debut, the underwriting banks increased the IPO range from $28-$35 to $35-$38, citing heavy demand. A day later, they increased supply to more than 420 million shares.
The new share and price allocation placed Facebook's valuation at the iconic $100 billion mark.
VII: THE GLITCH
Back in her home, Swaminathan didn't know about the reduced revenue estimates or about the vast number of hedge funds that were planning to short Facebook. After the opening bell ceremony neared its end at 9:30 a.m., she was still watching CNBC waiting for the stock to begin its scheduled trading at 11:00 a.m. "We are witnessing a lot of American wealth getting generated as we speak," said a CNBC reporter. "After years of people taking risks, dealing with uncertainty, unknowns, rivals, this is the pay-off."
"Awaiting Facebook's opening trade" showed in a breaking news box on the bottom of the screen, while an unchanged $38 opening price appeared on a split screen in anticipation of 11:00 a.m. Minutes later, Swaminathan, eager for the stock to open, called her son, who lives in New York City, to inform him about the 5,000 shares she had ordered. She had placed a buy limit order, a conditional transaction to purchase shares at a specified price -- $42 in her case -- or lower.
Her son, who studied finance at UC Berkeley, was livid. "Cancel the order immediately," he told his mother. "Cancel it! Cancel it!" Around 9:45 a.m., she hit the icon on her trading screen to cancel the order and then resumed watching TV. At 11:00 a.m., CNBC announced that Facebook's opening was delayed until 11:05 a.m. In all the times she had seen IPOs on television, Swaminathan had never witnessed a market delay on the opening day. Something is wrong, she thought.