Where's the love?
Facebook Inc. and its investors must be asking this question this morning, now that the post-initial-public-offering quiet period has ended for the company's big group of underwriters, freeing them up to finally publish research on the stock they so aggressively marketed last month. We might have expected the investment banks that backstopped the $16-billion (U.S.) share issue to give glowing reviews on the stock – especially given that it's trading about 15 per cent below where they had priced it for the IPO.
We'd have been wrong.
This morning, 13 of Facebook's 33 underwriters formally initiated research coverage on the stock, and their assessment has been lukewarm. They're in like with Facebook – not in love.
Bloomberg data show that seven of the 13 initiating analysts gave the stock buy/outperform/overweight recommendations, while five issued hold/neutral/sector perform ratings. One analyst – BMO Nesbitt Burns's Daniel Salmon – issued an underperform.
On average, that puts the new ratings about in line with the previous consensus view among analysts with smaller firms that weren't part of the underwriting syndicate.
Eight of the analysts issued 12-month price targets, with an average price of $37.88. That's even lower than the previous consensus – and, conspicuously, below the IPO price.
Investors had anticipated that the underwriters' analysts would be more bullish on the stock they helped create – a belief that was reflected in the stock's upturn in the days before the quiet period expired. The surprisingly tepid tone of the new research reports quickly reversed some of those gains: Facebook was down
Two of the three lead managers in the syndicate – Goldman Sachs and JP Morgan – issued the most bullish of the analyst reports, both with buy recommendations and target prices of $42 and $45, respectively. Facebook's biggest Wall Street partner – Morgan Stanley, the head of the syndicate and biggest participant, taking on nearly 40 per cent of the offering – also recommended an overweight position on the stock, but pegged its 12-month price target at the IPO price of $38.
"That means they are telling people who bought the IPO at $38 they made a mistake. In a year, Devitt thinks Facebook will be worth the IPO price," wrote financial blogger Jay Yarow of The Business Insider. "This is embarrassing for Morgan's bankers who sold the deal, but at least it shows there is independence at the bank."
Not only was Morgan Stanley the lead underwriter for the offering (and obviously has intimate knowledge of the company), but it was one of several banks involved in the deal that quietly lowered their financial forecasts for Facebook during the IPO's marketing roadshow. These revised forecasts were disclosed to key clients, but not widely disseminated to the broader market. Now, at least, we all get a better idea of what Morgan Stanley was thinking.