After days of stock-market failure, we find out the real deal behind Facebook's IPO preparations, which show a disconnect between institutional investors on the inside and the rest of the world on the outside. It's a disconnect we should have noticed during the media's constant roadshow coverage.
Per Business Insider's Henry Blodget and a thorough article by The Wall Street Journal's Shayndi Raice, Anupreeta Das and Gina Chon we learn that Facebook and its underwriters tipped off some inside "institutional" investors that the company's stock would not perform as well as anticipated, due to weaker ad-revenue forecasts. Regular people, however, did not get this information. In short, from Blodget: "In one of the biggest IPOs in history, in which a huge amount of stock was sold to small investors, privileged Wall Street insiders once again got top-notch information... and individuals got the shaft," he writes. That sure sounds like the selfish social media company we've come to know.
In short, here's what happened. After days (months? years?) of hype, Facebook filed amended IPO documents with reduced revenue forecasts buried down on page 57. The three banks underwriting the social network cut their forecasts for Facebook, without making it too public. Reuters' Poornima Gupta and Alexei Oreskovic have a rundown of those numbers, giving an idea of how much the outlook changed. Blodget says: "These estimate cuts were conveyed verbally to sophisticated institutional investors." This may have given these investors an "unfair advantage," in the words of Raice, Das and Chon. Blodget also says during the roadshow Facebook tipped off in a wink-wink nudge-nudge kind of way that Facebook wouldn't perform as well as expected. "Meanwhile, out in the real world, demand for Facebook stock was hitting a fever pitch," writes Blodget. "One senior stockbroker at a major brokerage firm reported that he 'had never seen such demand' for an IPO." These people didn't know about the downgrades. And that's how the price got set too high. People on the outside wanted it at $42, people in the know wanted it at $32. So we got a compromised $38.