Facebook's Stock Price Is Too Low, Says Facebook - DealBreaker

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Last week the Journal ran this sort of strange column from Ronald Barusch about IPO lockups asking “What is the point of the lockups to begin with and who gains from them?” and answering (1) without lockups “public offering prices would be lower to account for the risk of immediate sales by the insiders” and (2) “But who says that lower prices for selling executives and institutional investors — and for buyers in an IPO — would be a bad thing?” So that last question is actually pretty easy to answer: the selling executives and institutional investors say that lower prices would be a bad thing, because U’(W) > 0 etc. Thus, they sign lockups, limiting their own freedom to sell more shares in exchange for more money now. Or such is the theory, sold to them persuasively by bankers.

So what do you make of this?

Facebook Inc. Chief Executive Officer Mark Zuckerberg won’t sell his stock holdings in the company for at least a year, according to a regulatory filing.

Facebook’s shares have been marking record lows since the first lockup on share sales by insiders expired in August. Zuckerberg, who operates the world’s largest social-networking service, is facing investor concerns about how the website can generate more revenue from its growing user base.

Directors Marc Andreessen and Donald Graham also said they won’t be selling shares in Facebook, other than to settle tax obligations, the filing with the U.S. Securities and Exchange Commission said.

Shares in Facebook rose as much as 2.9 percent in after-hours trading, up from $17.73 at the close in New York.

Part of me, as a one-time capital markets banker, wants to yell at them: why not sign longer lockups then? But of course that’s dumb; memories are fickle and path-dependent and it’s not like Zuck’s 180-day lockup was nonstandard. Also: Facebook got $38 and won’t see that again for a while, so it’s not like they really left money on the table by not burying a 15-month Zuckerberg lockup on page 155 of the prospectus. You might instead ask why Zuckerberg wants to constrain his freedom today, to prop up FB’s stock price when he’s not selling any, but of course he’s not really constraining himself – the 8-K only says he “has informed us that he has no intention to conduct any sale transactions in our securities for at least 12 months.” Intentions can change.

The other, more interesting part of the 8-K – and a potential explanation for “why prop up the stock now?” – is this:

We currently expect that two trading days following the announcement of our third quarter 2012 financial results, we will vest and settle outstanding Pre-2011 RSUs …. To settle these RSUs, assuming an approximate 45% tax withholding rate, we anticipate that we will net settle the awards by delivering an aggregate of approximately 124 million shares of common stock to holders of Pre-2011 RSUs and withholding an aggregate of approximately 101 million shares of common stock. The 101 million shares that are withheld by us as a result of the net settlement of Pre-2011 RSUs will no longer be considered for accounting purposes to be issued and outstanding, thereby reducing our shares outstanding used to calculate earnings per share. …

Assuming the price of our common stock at the time of settlement was equal to $19.09, the closing price of our Class A common stock on August 30, 2012, we estimate that the aggregate tax obligation for the settlement of these RSUs would be approximately $1.9 billion. … We intend to fund these tax withholding and remittance obligations by using our existing cash and borrowings from our credit facilities. We currently do not expect to conduct any offering of our equity securities near the initial RSU settlement date to fund this obligation, nor do we currently expect to conduct an offering in connection with the expiration of “market stand-off” or “lock-up” restrictions in the fourth quarter of 2012.

Those shares come on the market in late October, and I guess the Facebookers will be salivating over them a bit more if they’re priced with a two handle. Henry Blodget refers to the above as a “Massive $2 Billion Share Buyback At Less Than Half Of The IPO Price,” which, I mean, let’s ignore what work “massive” is doing in front of “$2 billion” and focus on “share buyback”: is this a share buyback? It depends on your baseline; in the normal world, companies pretty much always net share settle RSUs for withholding purposes and then pay the withholding in cash,* and rarely issue more shares explicitly to pay for it, making this less of a “share buyback” and more of a “issuing fewer shares than you’d otherwise issue, if you were issuing more shares, which you probably wouldn’t be.”

But here Blodget is exactly right: Facebook was going around saying it would issue more shares to pay this withholding, so those extra shares were in everyone’s expectations. From the prospectus:

To fund the withholding and remittance obligations, we expect to sell equity securities near the initial settlement date in an amount that is substantially equivalent to the number of shares of common stock that we withhold in connection with these net settlements, such that the newly issued shares should not be dilutive. We have an exception in our “lock-up” agreement with our underwriters that would permit us to raise capital in an underwritten offering to fund these withholding and remittance obligations. However, in the event that we issue equity securities, we cannot assure you that we will be able to successfully match the proceeds to the amount of this tax liability. In addition, any such equity financing could result in a decline in our stock price. If we elect not to fully fund tax withholding and remittance obligations through the issuance of equity or we are unable to complete such an offering due to market conditions or otherwise, we may choose to borrow funds from our credit facilities, use a substantial portion of our existing cash, or rely upon a combination of these alternatives. In the event that we elect to satisfy tax withholding and remittance obligations in whole or in part by drawing on our credit facilities, our interest expense and principal repayment requirements could increase significantly, which could have an adverse effect on our financial results.

This incidentally is a great piece of prospectusese: if we elect not to dilute you and instead are forced into drawing on our very cheap credit facility, we will have to pay back that credit facility. “Shares in Facebook rose as much as 2.9 percent in after-hours trading, up from $17.73 at the close in New York,” so I guess no one is too broken up about that now.

One thing to maybe think is: if this is SUPER GREAT NEWS, and you go and buy a lot of FB stock, and you push the price up to $45, what will Facebook and Zuck do? Well, Facebook will probably … um … sell stock to pay for the tax withholding on those RSUs, no? (That was its original plan mainly because the withholding obligation goes up as the stock price goes up, meaning at some point it’d be using all its cash to pay that withholding.** With the stock at $100 it would have no choice but to sell stock.) And Zuck will … I mean, probably not sell stock, but he at least won’t feel too constrained by today’s “no intention to conduct any sale transactions in our securities for at least 12 months? Andreessen will be out of there like a shot off a shovel.***

I think all this 8-K says is “we try to buy low and sell high; we did a good job of top-ticking you at $38 in the IPO but we’re not going to be complete chumps at $17.73 – get it back in the $30s and we’ll talk.” Which really shouldn’t be news. But as Blodget points out, most companies do more like the opposite. So I guess that justifies a positive reaction to Facebook’s announcement that they have some price discipline: it doesn’t mean much, but it’s better than the alternative.

Facebook CEO Won’t Sell Shares For At Least A Year [Bloomberg]
Facebook Announces Massive $2 Billion Share Buyback At Less Than Half Of The IPO Price* [BI]

* So I mean here in banking, but also here in tech, additional examples left as an exercise etc. but, no, companies that have accountants don’t normally go around (1) evading withholding requirements on comp or (2) asking employees to stump up the money for them.

** Not, incidentally, at the point of $38 a share. You might read the original prospectus’s “we will need to issue stock to pay that withholding” to imply “… if the stock hits $100 as it surely will.” If it’d stayed at $38 would they have sold the shares?

*** I have no basis for saying this. But he’s a VC and thus all U’(W) > 0, whereas Zuck has an empire to build.

Stock de Facebook ha sufrido, pero algunos inversores ven valor a largo plazo

En mayo, cuando los inversores tropezar a comprar un pedazo de Facebook, no incluso los escépticos predijeron lo que ha sucedido. Tres meses después de la oferta, las acciones han perdido más del 40 por ciento de su valor, cerrando el viernes, en poco menos de $21.81 $38 el 18 de mayo.

La bolsa comenzó a sumergir inmediatamente después de su debut en los mercados públicos y en primeras errores técnicos con la oferta fueron culpados. Pero estos problemas no cuenta de penetración posterior de la culata, analistas y accionistas decir. Esa caída, dicen, se remonta a varios factores, entre ellos el tamaño y el precio de la oferta, salidas tempranos por grandes inversores inicial y frenando el crecimiento.

No menos importante, el stock parece haber sido gafada por cuento de hadas de Facebook.

"Los aseguradores (y los medios de comunicación) hicieron un gran trabajo de promocionar Facebook condujeron a la I.P.O. y el sell-side (incluido yo) hizo un gran trabajo de promocionar después," Michael Pachter con Wedbush Securities, una firma de investigación de equidad, escribió en un correo electrónico.

Aún así, algunos inversores siguen siendo alcista. Facebook es rentable, mantiene sus usuarios casi 1 billón pegados a sus pantallas más que cualquier otro sitio de Internet y agresiva está experimentando con nuevas formas de publicidad de tambor — su principal fuente de ingresos. Sólo este mes, por ejemplo, comenzó ofreciendo a los desarrolladores de aplicaciones una forma para anuncios de foco e intentó diversificar ingresos abriendo su sitio en Gran Bretaña para juegos de azar en línea.

La próxima prueba para el stock podría llegar pronto. Acciones más 1,60 billones serán elegibles para entrar en el mercado en varias oleadas, comenzando el jueves, cuando se permite un número de accionistas para vender. Los inversores temen que un influjo de acciones podría provocar que bajen aún más los precios.

"Se convierte en una empresa que se percibe como más vulnerable que invencible," dijo David B. Yoffie, un profesor de Harvard Business School, que se asienta sobre varias placas de empresa de tecnología, aunque ninguno de los que se refieren a o competir con Facebook.

Ejecutivos de Facebook dicen que permanecen enfocados en expandir. Negó a comentar sobre el precio de las acciones, pero a finales de julio, en una conferencia telefónica con analistas para discutir las ganancias del segundo trimestre, David Ebersman, chief financial officer de la compañía, dijo que estaba "decepcionado" por la inmersión de stock. El viernes, el Sr. Ebersman fue en Nueva York hablando a los inversores, actuales y potenciales.

Un ex empleado de Facebook, que no quería ser llamado porque no quería dañar su relación con sus compañeros onetime, dijo que esperaba que otros empleados a dinero en efectivo en sus opciones sobre acciones tan pronto como pudieran y predijo que los males del stock podrían hacer difícil retener y contratar talento. Ya no es dueño de acciones de Facebook.

El ex empleado señaló que muchos de los partidarios de grandes principios de la compañía, incluyendo Peter Thiel, inversor ángel original y Accel Partners, uno de sus primeros inversores de capital riesgo — vendido una parte considerable de sus acciones al precio máximo.

Mark Zuckerberg, cofundador y Director Ejecutivo, vende una parte de sus acciones en la oferta, para satisfacer sus facturas de impuestos, dijo la compañía. Dicho todo esto, los primeros partidarios más vendieron $9 billones en acciones. Todavía poseen cantidades significativas.

Kevin Landis, oficial jefe de inversión de los fondos de primera mano, una empresa de gestión de activos, ahora tiene que sopesar qué hacer con su pedazo de Facebook. El año pasado, compró lo que fueron entonces codiciado Facebook comparte en privado el mercado. En promedio, sus acciones valen ahora de cerca de dos tercios de lo que pagó. Bajo los términos de la compra, no podrá vender hasta fines de este año.

No es "un buen presentimiento", dijo, pero agregó que permaneció seguro que con tantos usuarios y muchos datos sobre ellos, Facebook estaba destinada a ser la plataforma de publicidad más lucrativa del mundo.

Evelyn M. Rusli contribuyó informes desde Nueva York.

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Facebook’s Stock Has Suffered, but Some Investors See Long-Term Value

In May, when investors tripped over themselves to buy a piece of Facebook, not even the skeptics predicted what has happened. Three months after the offering, shares have lost more than 40 percent of their value, closing at just under $21.81 on Friday, from $38 on May 18.

The stock began to dip immediately after its debut on the public markets, and at first technical errors with the offering were blamed. But these problems did not account for the stock’s subsequent plunge, analysts and shareholders say. That decline, they say, can be traced to several factors, among them the sheer size and price of the initial offering, early exits by major investors and slowing growth.

Not least, the stock seems to have been jinxed by Facebook’s own fairy tale.

“The underwriters (and the media) did a great job of hyping Facebook leading up to the I.P.O., and the sell-side (including me) did a great job of hyping it after,” Michael Pachter with Wedbush Securities, an equity research firm, wrote in an e-mail.

Still, some investors remain bullish. Facebook is profitable, it keeps its nearly one billion users glued to their screens longer than any other Internet site, and it is aggressively experimenting with new ways to drum up advertising — its main source of revenue. Just this month, for instance, it began offering application developers a way to focus ads, and sought to diversify revenue by opening its site in Britain to online gambling.

The next test for the stock could come soon. Over 1.6 billion shares will be eligible to come on the market in several waves, starting on Thursday, when a number of shareholders are allowed to sell. Investors may fear that an influx of shares could cause prices to fall even more.

“It becomes a company perceived as vulnerable rather than invincible,” said David B. Yoffie, a Harvard Business School professor who sits on several technology company boards, though none that relate to or compete with Facebook.

Facebook executives say they remain focused on expanding. They declined to comment on the stock price, but in late July, in a conference call with analysts to discuss the second-quarter earnings, David Ebersman, the company’s chief financial officer, said he was “disappointed” in the stock dive. On Friday, Mr. Ebersman was in New York speaking to investors, current and potential.

One former Facebook employee, who did not want to be named because he did not want to damage his relationship with onetime co-workers, said he expected other employees to cash in their stock options as soon as they could, and predicted that the stock’s woes could make it difficult to retain and hire talent. He no longer owns Facebook stock.

The former employee pointed out that many of the company’s early big backers — including Peter Thiel, an original angel investor, and Accel Partners, one of its first venture capital investors — sold a hefty portion of their shares at the peak price.

Mark Zuckerberg, a co-founder and chief executive, sold a portion of his shares in the offering, to meet his tax bills, the company said. All told, the early backers sold over $9 billion in shares. They still own significant amounts.

Kevin Landis, chief investment officer of Firsthand Funds, an asset management firm, now has to weigh what to do with his piece of Facebook. Late last year, he bought what were then coveted Facebook shares on the private market. On average, his shares are now worth about two-thirds of what he paid. Under the purchase terms, he may not sell until late this year.

It’s not “a good feeling,” he said, but he added that he remained confident that with so many users and so much data about them, Facebook was destined to be the most lucrative advertising platform in the world.

Evelyn M. Rusli contributed reporting from New York.