Facebook's (FB) stock crash has done more than blindside investors who figured that no price was too high for the IPO. The stock's sell-off has even rattled CEO Mark Zuckerberg, who famously said he cares more about the company's social mission than its stock price. But as investors quickly lose faith in the company's future -- the stock price has fallen nearly 50 percent since the May 18 public offering -- Zuckerberg can no longer just concern himself with programming code.
According to The Wall Street Journal, the 28-year-old Facebook founder recently admitted at a companywide meeting that it has become "painful" for some employees to watch investors dump Facebook stock. Zuckerberg's own personal wealth has largely followed the trajectory of the stock. He's still one of the richest people in the world, with an estimated $10.1 billion net worth, but that's a significant drop from the $19.1 billion he made from the company's IPO. Zuckerberg has been trying to refocus his employees' attention away from the stock price and has been aggressively defending the company's ability to meet its market expectations. But the stock crash has invariably created a bunch of new problems for the company:
- Lockup releases will likely lead to hundreds of millions of new shares being dumped on the market over the next six months ... and Facebook can no longer do a simple "follow-on offering" to manage this process.
- Facebook faces a massive ($3 billion) tax bill related to its employee stock compensation and can no longer do what it planned to do, which was sell shares to raise this cash.
- Facebook employees now have less incentive to stay at the company than they did prior to the IPO, which may make retention more difficult and expensive.
All of these issues could put additional pressure on Facebook's share price. Let's take each in turn.
A huge number of Facebook shares will become eligible for sales in the next year. Realistically, with the stock nearly 50 percent below the IPO price, Facebook can no longer do a "secondary" stock offering to manage this process. As a result, the shares may hit the market in an unpredictable but steady stream, providing an overhang of "supply" that could depress the stock price for a year.
Facebook currently has a "float" (tradable shares) of about 420 million, which were sold at the IPO. This represents 15 percent of the company's outstanding shares.
Here are the Facebook lockup releases that are coming over the next year, as compiled by analyst Ken Sena of Evercore:
FACEBOOK LOCKUP RELEASES:
- Aug. 15: 268 million shares, 10% of shares outstanding.
- Oct. 14: 249 million shares, 9% of shares outstanding.
- Nov. 13: 1.332 billion shares, 49% of shares outstanding.
- Dec. 13: 124 million shares, 5% of shares outstanding.
- May 17, 2013: 47 million shares, 2% of shares outstanding.
Over the next four months, in other words, two billion Facebook shares will become eligible for sale—about 70 percent of Facebook's total shares outstanding.
Although the desire of shareholders to sell may be muted now that the stock is trading below $20 a share, some will undoubtedly want to sell. And if and when the stock rises, more will want to. This will likely create a steady supply of "share overhang," which will steadily introduce new shares to the market over the next year or more.
All companies face lockup releases after they go public. The normal plan is usually to go public and then, assuming the stock rises, to do a "secondary" stock offering within six months. Secondary offerings typically depress stock prices, in part because they're often done at a modest discount to the trading price. But they also eliminate uncertainty and "overhang" by lumping all the shares that are sold into a single big trade. Once that trade is out of the way, the market once again focuses on the company's fundamentals, and the stock trades normally.
Given the massive amount of stock that will become eligible for sale at Facebook over the next year, it is highly likely that the company planned to do a secondary offering after the IPO to smooth this process.
The other problem that Facebook's stock crash has created is that it will likely make it more difficult—or, at least, expensive—for the company to retain its employees.
Every Facebook employee who joined the company in the past 18 months, since the end of 2010, is now "underwater" on his or her stock grant (meaning, in this specific case, that the stock price is below the level it was when the employee joined the company).
Not as much fun as it was three months ago.
And if Facebook's stock were to stay at the current level, Facebook might be forced to give some of its employees additional stock or cash as compensation to keep them at the company. And this, in turn, could result in additional dilution for shareholders and/or lower operating margins for the business.
The bottom line is that Facebook's stock crash has created several additional headaches for the company. None of them are life-threatening, but they all could have a negative impact on the stock price.
