More interesting times have arrived for holders of Facebook stock. The stock, which has been brutally beaten down from its IPO price, faces new challenges as the “lockup” restrictions (which have been in place since the IPO) began to expire on August 16. This means that a significant number of Facebook shareholders are now able to sell their shares in the open market, and significant numbers of Facebook shares will be freed from these restrictions over the next few months. The sale of a substantial number of Facebook shares could obviously drive the stock price down even more. The big questions now: Who will or won’t sell their stock as these restrictions lapse?
This situation is also a great lesson for entrepreneurs who are contemplating the possibility of taking their companies public. Most observers thought that Facebook’s IPO was a certain success, but so far it’s been a very tough road. One big concern here is that the problems that Facebook has faced with its transition to public company status will divert management’s attention from the company’s business tactics and strategy at a very critical time.
Facebook went public at a price of $38 per share. Many observers felt that this price was too high, and the market apparently agreed. The stock has not been back to its IPO price since the first day of trading, and its closing price on August 17 was $19.05 per share (a 49.9% decline from the IPO price). The stock price went below $19.00, but has since rebounded to close at $19.44 today. In any case the company has lost almost half of its market value since the IPO. Even at this reduced price the stock is still trading at about 30 times projected next years’ earnings. It’s interesting to note that Google and Apple currently trade at 12 to 13 multiples, so Facebook’s stock is still very highly valued even after its decline.
Lockup restrictions on stock sales by insiders and other parties are normally demanded by underwriters as part of the IPO process. These restrictions help to reduce volatility in the market price of a newly public company’s stock, and they help to ensure that existing shareholders won’t unduly depress the stock price by cashing in on their stock positions too quickly. In many situations these restrictions are removed in a stepwise manner over time, normally beginning 180 days after the IPO. Facebook’s lockup periods began to expire only 90 days after the IPO, and they will continue to be removed for other shareholders periodically over the next few months.
The problem for Facebook is that a very significant number of its shares will become free from these lockup restrictions over the next few months. Approximately 271 million shares became free from these restrictions when they first began to lapse on August 16. Additional lockup restrictions will continue to lapse, and it appears that a total of approximately 2 billion shares will be freed from these lockup restrictions by May 2013. There are currently less than 500 million shares trading. Mark Zuckerberg, Facebook’s CEO, will become free from these restrictions in November. Facebook’s significant early investors will also be free to sell their Facebook stock as these restrictions lapse.
It is unlikely that Zuckerberg or any of the high ranking Facebook executives will sell significant amounts of stock since that would send a very negative signal to the market and would likely lead to significant sales by other shareholders. Additionally, many of these parties sold substantial amounts of shares in the IPO. It is more difficult to predict how some of the large early investors will react. Some of these investors have profitable positions in Facebook even though the stock has not performed well since they made their investments at very favorable valuations. These early investors may see any opportunity to take a profit now rather than bear the risk that Facebook’s stock price will not decline further over time. There has also reportedly been a movement by some of the early investors in Groupon, Inc. to sell significant amounts of their shares based on a lack of belief in Groupon’s future growth. This same sentiment could be present with Facebook’s early investors, and they could sell significant amounts of their shares now.
It’s also interesting that the prospect of Zuckerberg stepping down (voluntarily or involuntarily) has been circulating around the tech industry. I’m not sure if any such discussions have occurred within the company, but it’s surprising that this subject has even come up. In any case this is probably a moot point given Facebook’s voting structure which gives Zuckerberg substantial control rights.
One situation that may help to mitigate some of the potential stock price damage is that many Facebook employees and other shareholders were able to sell their stock before the IPO due to the presence of a limited private company trading market that was in place for Facebook stock. It is likely that some of these early shareholders were able to sell their stock in this market and thus may not be as motivated to sell shares today, especially at the current low share price. I don’t believe that this will have a significant impact, however, as there are still several major shareholders who are potential sellers of Facebook stock once the restrictions lapse. Any decisions by these shareholders to sell their shares could drive a stock price decrease.