Facebook Unmasked: 2B Shares Set To Go On Sale Over Stock Crash

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Facebook Inc (NASDAQ:FB) is staring at a possible mass walkout of the insider investors as the stock crash continues to exhibit signs of unlikely follow-on share sale by the social networking giant. Approximately, 2 billion Facebook shares, or 70% of shares outstanding will be eligible for sale in the next four months.

Facebook Unmasked: 2B Shares Set To Go On Sale Over Stock Crash

Facebook Inc (NASDAQ:FB)’s stock price has declined by nearly 40% from its initial public offer price of $38 per share, triggering several interesting scenarios for the company. Ideally, Facebook would be planning to do a secondary offer to follow on the initial offer, which in most cases, companies use as a pilot project, to assess the viability of the public fund raising option.

However, according to the current market price of the company’s stock, it is unlikely that Facebook will follow in the footsteps of Zynga Inc (NASDAQ:ZNGA) and LinkedIn Corporation (NYSE:LNKD), as witnessed last year. The factors driving the unlikelihood of a secondary offer emanate from different quarters of Facebook’s business portfolio.

To begin with, over 2 billion Facebook shares will be eligible for sale within the next four months via lock-up release strategy, as compiled by Ken Sena of Evacore. The net effect of this strategy, however smart that is, taking into consideration the current bear environment surrounding Facebook stock price at the NASDAQ stock exchange, this sequential 2 billion lock-up release plan is likely to exert more pressure on the stock for a period not less than a year.

Just before the company’s stock hit the downhill runway, Mark Zuckerberg and twelve other insider investors damped over 241 million Facebook Inc (NASDAQ:FB) shares for an estimated total value of $9.8 billion. The the bullish majority who bought from them are now counting a collective loss of approximately $5 billion, as per the current market price, which values the 241 million shares at around $4.8 billion. Zuckerberg himself cashed in 30.2 million shares for an amount estimated to be $1.14 billion. Other insiders who sold out include Accel Partners, Peter Thiel, DST Global, Mark Pincus, the CEO of Zynga, and Tiger Global, a hedge fund among others.

Nonetheless, Facebook Inc (NASDAQ:FB) Investors can marvel in the fact that, the declined share price presents an opportunity to hedge against their current losses. This will, however, depend on the future outlook of the company, judging by its fundamentals. A bright future with a price target of $31 as predicted by several analysts after mediocre post IPO performance would offer a fantastic opportunity to hedge, if at all it ever becomes a reality.

Acquiring twice as many Facebook shares as you hold today could result in zero losses, with the exclusion of opportunity loss. Nonetheless, that is just theoretical evaluation; we have on a number of occasions reported on Facebook’s bleak traffic monetization, as experienced by other social sites as a major stumbling block to its future earnings.

Additionally, the company’s stock despite the current plunge, cannot be considered as an undervaluation. Illustratively, its stock price of $21 per share is approximately 33X next year’s projected earnings per share, while the industry average including the like of Google Inc. (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) stands at 12.5X, or 13X and 12X respectively for the two tech giants.

The planned lock-up release is a clear indication that Facebook had a series of back up plans before its botched IPO. This strategy is not just about the negatives; it does have its own positives. The controlled manner of releasing the shares to the market ensures that the shares do not hit the market randomly, thereby eliminating uncertainty.

Nonetheless, Facebook is burdened with a huge tax bill set to be paid within the next three months. Through its Restricted Stock Units (RSUs), the company faces an impending tax bill of approximately $3 billion in the form of withholding taxes. However, if the stock price declined further, before October, which marks the date when the first batch (as per SEC Form 10-Q Filing) RSUs vest (become recognizable as employee compensation), then the tax bill would decline accordingly. However, a rally by the company’s stock before then will soar the bill.

Therefore, Facebook Inc (NASDAQ:FB) will be writing a big check to the government soon, and this will require some serious cash deposits. Unfortunately, the company cannot do a follow-on offer to raise this cash; but fortunately, a second look at its balance sheet will give Zuckerberg a sigh of relief as the company has over $10 billion in cash. So, no much worry about for the social network giant as the impending cash outflow is unlikely to stutter the company’s operations.

Furthermore, considering that the RSUs, unlike the Employee Stock Options, are pegged to the performance of the company’s stock, this means that Facebook employees have lost value significantly under the current stock price. This is quite demotivating, and considering that a vast majority of the current Facebook staff are less than a year old, it means that, by the time they joined the company’s stock held a higher value, which perhaps was one of the motivational factors.

Consequently, this might mean that their compensation package have been revised downwards. Therefore, Facebook faces yet another challenge of retaining its staff. This could mean yet another cash outflow in the form of compensation to its employees due to the stock crash.

Parting Shot

Facebook Inc. may have $10 billion in cash to cater for its unavoidable tax bill along with other incidentals, but its inability to raise capital through public means is a clear indication that its relationship with major stakeholders is not as merry as before. In addition to this, the fact that the company’s insiders are selling off their stockholding is heart throbbing; this creates an image of distrust in the company’s stock. There is no legal requirement that would bar Facebook from launching a secondary offering, but the current market prices are more than prohibitive to pursue that strategy.

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