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Facebook Investors Brace for More Shares Coming to Market

By Brian Womack and Aaron Ricadela - Aug 20, 2012 1:07 AM ET

Facebook Inc. (FB) shares, which fell to a record low after insiders could sell stakes for the first time since the initial public offering, will face more pressure when another 1.44 billion shares are freed up through November.

Facebook last week unlocked 271.1 million shares, the first of five insider sale restrictions scheduled during its first year as a public company.

By May the number of shares on the market will increase by 1.91 billion, compared with 421.2 million shares at the IPO.

While Facebook Chief Executive Officer Mark Zuckerberg operates the world’s largest social-networking service, he’s facing investor concerns about how it can generate more revenue from its growing user base. That, plus the end of the first lock-up, drove the shares to half the offering price of $38, wiping out almost $46 billion in market value.

“Is this something impatient or nervous investors should be worried about?” said Herman Leung, analyst at Susquehanna International Group. “Yes, but for the long-term investors, I view this as an opportunity to potentially get a stock at a pretty good price.”

Regulatory filings as soon as this week will disclose how many major shareholders sold their stock. Insiders are seen selling about 55 percent of the 1.2 billion shares that are set to come unlocked on Nov. 14, according to an Aug. 9 research note by Brian Wieser at Pivotal Research in New York.

Hedge funds that are using so-called short sales to benefit from the stock’s decline may be active ahead of mid-November, said Jay Ritter, professor of finance at the University of Florida. These investors will probably sell shares with the aim of buying them back at a discount at a later date, he said.

‘Selling Pressure’

“There will be selling pressure before the Nov. 14 lockup expires,” said Ritter, based in Gainesville, Florida.

Ashley Zandy, a spokeswoman for Menlo Park, California- based Facebook, declined to comment.

The shares dropped 4.1 percent to $19.05 at the close in New York on Aug. 17. Just before trading ended, Facebook touched a record intraday low of $19. More than 129 million shares were traded, after 157.6 million a day earlier when the lock-up expired, above the daily average volume of 48.7 million.

By May the number of shares on the market will increase by 1.91 billion, compared with 421.2 million shares at the IPO.

Facebook’s first earnings report as a public company last month also fueled concerns over how quickly it can draw revenue from mobile devices. Second-quarter revenue grew 32 percent from a year earlier, down from 45 percent in the first quarter.

Facebook’s mobile advertising services are a key concern for investors as more users turn to tablets and smartphones. The company should benefit in the coming months from new tools and services that help companies market their wares to users on the go, said Scott Kessler, an analyst at S&P Capital IQ.

Real Questions

“The fundamentals are better than people think,” said Kessler. Two days before the lock-up ended, he had upgraded the shares to buy and said that while there are real questions about the company, annual revenue growth should be at least 25 percent for the next three years.

Early Facebook investors such as DST Global Ltd., Goldman Sachs Group Inc. (GS), Elevation Partners and Accel Partners could start selling part of their holdings last week, Facebook has said in filings. Microsoft Corp. (MSFT), based in Redmond, Washington, was likely to hang on to its stake after the lock-up ban lifts, a person with knowledge of the matter said on Aug. 10. Microsoft views Facebook as a strategic partner against Google Inc. (GOOG), rather than as a near-term moneymaker, said the person, who requested anonymity because the plans are private.

Wild Card

Other investors have been preparing for potential sales. Director Peter Thiel, who sold in the IPO, gave himself more flexibility to unload holdings, according to a regulatory filing. One of Facebook’s earliest investors, Thiel converted more than 9 million shares to Class A from Class B. Class A shares are easier to sell on the public markets.

The shares freed up last week represent 14 percent of the 1.91 billion that will become available for sale in the coming nine months. The next expiration date comes between Oct. 15 and Nov. 13, when restraints are removed on about 243 million shares. Lock-up expires on about 1.2 billion shares on Nov. 14, and for 149.4 million shares a month later. A final round comes May 18, 2013, with 47.3 million shares becoming available.

The stock being sold Nov. 14 would include shares from current and former employees, as well individuals who bought stock from them, Pivotal Research’s Wieser said in his note.

“This date becomes the greatest wild card,” he wrote. “As the base of shareholders eligible to sell will be much more fragmented, orderly outcomes become much more uncertain.”

To contact the reporters on this story: Brian Womack in San Francisco at [e-mail]; Aaron Ricadela in San Francisco at [e-mail]

To contact the editor responsible for this story: Tom Giles at [e-mail]