In a market that has found any excuse possible to go negative on Facebook shares, the latest naysayers' heyday is imminent: the expiration of the "lock-up" on sales of stock by certain insiders.
Will the beleaguered Facebook, which has lost half of its value from its $38 (U.S.) initial public offering price, continue its free fall Thursday, when the lock-up expires? There will be some downward pressure, logically, but it seems unlikely, in my view, that Facebook insiders will stampede for the exits as quickly as other public investors have over the past couple of months.
First, let's examine the lock-up. Companies that go public typically restrict insiders from selling shares on the public market for a period of time after the IPO; Facebook is no exception. The idea is to prevent the private owners from selling quickly into the public markets, which would create downward pressure and potential losses for the newest investors.
In the past few months, as many of the standard-bearers of social media have stumbled, the expiration of the lock-up resulted in declines in the share price. CNNMoney's Julianne Pepitone noted that LinkedIn Corp., one of the success stories, still lost 7 per cent on lock-up expiry day, and Groupon Inc., not a success story, fell 10 per cent.
While there will quite likely be higher volume on Thursday, with some price decline, I don't think it will be the latest disastrous day in Facebook's short public life.
Contrary to the folks who believe Facebook is a giant turkey-cum-scam that its creators foisted on an unsuspecting investing public, I believe Facebook insiders are genuinely surprised and disappointed by the stock's performance. I don't believe they think $20 represents the true value of a company that went public at $38 in May.
Facebook insiders also had nearly unprecedented opportunities to sell before the IPO in highly liquid private transactions (although Facebook and other previously private high fliers discouraged the practice, in part by charging high transaction fees.
The IPO gave shareholders an excellent opportunity to liquidate portions of their positions, which they did: Large stockholders (5 per cent of the company or more) sold, on average, about 29 per cent of their positions in the offering, per Facebook's prospectus. Other selling stockholders sold about 18 per cent of their positions.
CEO Mark Zuckerberg sold 30 million of his nearly 534 million shares, primarily to pay taxes incurred as he exercised 60 million stock options at IPO time, the company said.
Finally, the Facebook lock-up is staggered: Just over 271 million shares are newly eligible for sale Thursday, about 13 per cent of the 2.14 billion shares currently outstanding. Some insider shares, held by investors Mail.ru Group Ltd. and DST Global Ltd., are locked up for a full year, which helps explain why they were two of the more aggressive sellers in the IPO.
(Full disclosure: I own 100 shares in Facebook)
David Milstead