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Facebook, banks sued over pre-IPO calls

May 23 2012 18:03

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New York - Facebook and banks including Morgan Stanley have been sued by the social networking leader’s shareholders, who claim the defendants hid Facebook’s weakened growth forecasts ahead of its $16bn initial public offering (IPO).

The defendants, who also include Facebook CEO Mark Zuckerberg, are accused of concealing from investors during the IPO marketing process "a severe and pronounced reduction" in revenue growth forecasts, resulting from increased use of Facebook’s app or website through mobile devices.

Facebook went public last week.

The lawsuit was filed in the US District Court in Manhattan on Wednesday, according to a law firm for the plaintiffs. A day earlier, a similar lawsuit by a different investor was filed in a California state court, according to a law firm involved in that case.

In the New York case, shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were "selectively disclosed by defendants to certain preferred investors" rather than to the public generally.

"The value of Facebook common stock has declined substantially and plaintiffs and the class have sustained damages as a result," the complaint said.

Representatives of Facebook and Morgan Stanley did not immediately respond to requests for comment.

Facebook shares fell 18,4% from their $38 IPO price in the first three days of trading, reducing the value of stock sold in the IPO by more than $2.9bn.

Needham starts with 'buy'


Meanwhile, brokerage Needham & Co on Tuesday started coverage on Facebook with a "buy" rating, a rare positive take on the shares.

Facebook should be valued based on the revenue potential from total minutes spent on the website, Needham analysts said, setting a $40 price target on the stock.

About 14% of the total time spent online across the world is on Facebook, suggesting that the company’s revenue potential is $14bn globally and $6bn from the US alone, the brokerage said.

Facebook posted $3.7bn in revenue in 2011.

The social networking provider should have higher revenue than Google over time because the number of users are about the same but the average time spent by a person on the website is three times more than on Google.com, the brokerage said.

Google’s revenue was $37.91bn in 2011.

"[Facebook’s] global platform with long engagement times gives it a unique strategic position to generate revenue from global advertisers, payments, services etc," said Laura Martin in a note to clients. "It also represents a meaningful barrier to entry."

Ms Martin is rated four stars by Thomson Reuters StarMine for the accuracy of her earnings estimates on the companies under her coverage.

Google views Facebook as a threat and is moving aggressively to integrate social networking features across its products.

Facebook, whose margins are significantly higher than Google’s in its first five years of existence, has about 900-million monthly users after eight years in existence compared with Google’s 1-billion after 14 years, the brokerage said.

Facebook’s operating margins are enormous and expanding, Needham said. "This powerful economic engine suggests profit growth will be faster than revenue growth."

S&P Capital IQ, however, started Facebook with a "sell" rating raising questions about the effectiveness of its advertising platform, margins on marketing messages on mobiles, and risks related to the use of sensitive personal details.

The brokerage, in a report dated 22 May, set a $30 price target on the stock.
mark zuckerberg  |  ipo  |  facebook
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