Facebook Inc. FB -6.27% shares sank 6.3% to a record low on Thursday, August 16, 2012, falling below $20 a share on a day when some early investors were allowed to unload their stakes, adding further pressure on the beaten-down stock.
Rules expired Thursday that had restricted some early investors from selling down their stakes after Facebook's initial public offering. More than 271 million Facebook shares became eligible for sale Thursday, though holders could also choose to keep some, or all, of their stakes. Any additional shares would add to the 421 million already in circulation.
Facebook declined $1.33 to $19.87 on the Nasdaq Stock Market at 4 p.m. Thursday, after hitting a record intraday low of $19.69.
The prior closing low of $20.04 was hit Aug. 2.
Upward of 141 million shares had traded by 3:30 p.m. New York time, more than triple the stock's daily average over the past 30 days, according to the WSJ Market Data Group. That was greater than the full-day activity in all but two sessions: the first two days Facebook was public and the day after it reported second-quarter results in July.
Evercore Partners analyst Ken Sena said.
"It's basically supply and demand. You have a lot of supply of shares coming to market, so even to those who feel that the stock is priced attractively at these levels, there's no reason to step in and buy."
Mr. Sena said.
"There's a lot uncertainty to try and say what's the right price to reflect the amount of supply that's going to come to the market, because it's something that's going to continue to trickle out. So it's something that could create a prolonged overhang on the shares."
A Facebook spokeswoman declined to comment on the stock activity.
The stock that became eligible for sale Thursday was just the first of some two billion shares tied up in what are known as lockup agreements, which prevent selling by investors who bought stakes in Facebook before the May 18 IPO.
Banks underwriting companies' public debuts often require selling shareholders to keep a portion of their stakes at first, to reassure investors their interests will remain aligned with those early backers' interests, and to bolster the stock price through scarcity.
Facebook has detailed in regulatory filings when such agreements expire. The biggest lockup expiration, freeing more than one billion shares, is set for Nov. 14. The last lockup expires next May.
Thursday's decline raised questions about the ability of Facebook's shares to hold up as more shares come to market, as the lockup expirations have been well-telegraphed.
The decline extended Facebook's plunge from its $38 IPO price.
Also weighing on shares in recent weeks: In late July, Facebook said it swung to a loss in the second quarter as revenue growth slowed and costs rose.
Meanwhile, technology shares in the broader market rose, with tech stocks in the Standard & Poor's 500-stock index advancing more than any other sector. Overall, major benchmarks traded higher.
As trading volume in Facebook stock surged, so, too, did its volume in the options market, as traders closed out bearish positions for hefty profits.
Investors who set up bets earlier in the week that the stock would fall were walking away Thursday with as much as double what they paid for the positions. The sharp decline in the stock's price made bearish options more valuable.
Options traders are even more bearish about the pending November lockup expiration, when 1.32 billion more shares become free to trade. Nearly two-thirds of options bets expiring in the weeks after that expiration are concentrated in bearish contracts.
COMMENTARY: When companies go public, as Facebook did in May, company insiders and early investors can typically sell only a fraction of their shares, which are then traded freely on the stock market. The rest of their holdings are restricted from sale during a "lockup" period, which usually expires six months after the IPO.
After the lockup ends, the number of shares in the market can multiply several times over, often causing prices to fall.
Facebook chose to spread its lockup periods over a year. The first expiration caused the number of the company's publicly traded shares to balloon by 64% to 692 million.
Behind the trend: supply and demand. Until Thursday, August 16, 2012, only about 421 million shares of Facebook were freely traded. When the last Facebook lockup expires next May, there will be 2.14 billion shares floating in the market.
Here's a complete schedule of the Facebook (and Zynga's) lockup periods.
It really gets scary with Facebook's next lockup period expiration date of October 15, 2012, when another 243 million shares are allowed to be sold by insiders and early investors. Then on November 14, 2012, a total of 1.323 million shares are allowed to be sold by insiders and early investors. If Facebook's share price continues to plummet due to poor earnings reports or insiders decide to bailout between now and mid-October 2012, the result could be catastrophic for Facebook shareholders.
Insiders and early investors are unlikely to sell all those shares at once, but many who have waited years to realize their gains will be quick to cash out at least some of their stake, says Daniel Bradley, a finance professor at the University of South Florida who has studied IPOs.
He says while nothing that some sellers simply might be diversifying.
"If you have a significant amount of insider selling, it says something about what they believe the fundamental value [of the company] is."
It also is a bad sign if institutional investors, such as mutual funds and market makers, sell large blocks of shares before the lockup expiration, says Nikhil Varaiya, a finance professor at San Diego State University. That is because institutional investors are usually more knowledgeable about companies they sell than small investors, he says.
Prof. Varaiya found that the more big trades a company sees in its first days of trading, the worse the shares perform after the lockup expires. The effect hurts performance for up to three years after the IPO, and isn't diminished even if other investors make big purchases to offset the sales, he says.
That could spell trouble for Facebook. In June, mutual funds run by Fidelity Investments sold 1.9 million shares of the company, according to monthly portfolio disclosures.
Big investors, including Fidelity, have also already unloaded thousands of shares of Splunk, whose lockup expires in October.
I don't feel sorry for Facebook's major insiers and early investors. They did pretty well during the IPO when Facebook shares sold at between $38 and $45 per share. During the IPO, Facebook insiders and early investors cashed-out to the tune of a staggering $10 billion, including (courtesy of Henry Blodget, still doing penance):
- Facebook CEO Mark Zuckerberg: $1.14 billion.
- Accel Partners: $2.1 billion.
- Peter Thiel: $638 million.
- DST Global: $1.7 billion.
- Goldman Sachs: $923 million.
- Mail.ru Group: $745 million.
- Tiger Global: $722 million.
Most of these early investors still own Facebook stock, so their holdings have declined, like all shareholders. But the cold-hard cash they made by selling shares in the IPO has no doubt salved the distress caused by the stock’s plunge. In a blog post dated May 21, 2012, I provided a detailed list of these insiders, early investors and a few lucky stiffs.
Through all of this volatility, Facebook CEO Mark Zuckerberg has remained silent. In fact, Facebook representatives have refused to comment on its share price. As of this writing, Facebook shares hit a new low of $19.04, with nearly 100 million shares exchanging hands. It's entirely possible that by the end of trading, that Facebook shares could dip below $19.00 a share. This is quite possible because many of them have shorted. This tells you that they believe Facebook could sink even lower.
UPDATE: Does not appear that Facebook's stock price slide has slowed dow, today, August 17, 2012, the price dropped another $0.82 or -$4.13% to end trading at $19.05, and hit a new low. In after-hours trading, Facebook shares were down another $0.03 to end at $19.02. Earlier I thought that the price could dip below $19.00, so that is really cutting it close. Let's see what happens on Monday, August 20, 2012.
Courtesy of an article dated August 16, 2012 appearing in The Wall Street Journal Online an article dated August 13, 2012 appearing in Time Magazine and an article dated August 17, 2012 appearing in The Wall Street Journal and an article dated August 16, 2012 appearing in ValueWalk