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.
The sudden caution very close to the huge initial public offering, and while an investor roadshow was underway, was a big shock to some, said two investors who were advised of the revised forecast.
They say it may have contributed to the weak performance of Facebook shares, which sank on Monday - their second day of trading - to end 10% below the IPO price. The $38 per share IPO price valued Facebook at $104 billion.
The change in Morgan Stanley's estimates came on the heels of Facebook's filing of an amended prospectus with the US 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.
"This was done during the roadshow - I've never seen that before in 10 years," said a source at a mutual fund firm who was among those called by Morgan Stanley.
JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook's May 9 SEC filing, according to sources familiar with the situation.
Morgan Stanley declined to comment and Devitt did not return a phone message. JPMorgan and Goldman both declined to comment.