Facebook crystallises blundered IPO with buyback

NEW YORK—Facebook has crystallised its blunder of an initial public offering with a stock buyback. Mark Zuckerberg’s social network will essentially cut its outstanding share count by about 101 million, or four per cent, by promising to use cash, rather than stock, to settle a tax obligation.  Buying back stock four months after an initial public offering (IPO) at half price looks cynical. This is more a case of incompetence. Facebook’s stock has halved. So it is taking several steps to deal with, and possibly stanch, some of the bleeding. Zuckerberg has pledged to not sell any of his roughly 500 million shares for at least 12 months. The company will also ease some lock-up provisions on shares held by employees who aren’t directors. The first gives some comfort to investors concerned about insider sales and reinforces belief that Facebook’s founder is more concerned about how the firm fares over the long run than a quick buck. The second will help calm employees’ fears about being trapped in a falling stock. That’s bad for morale and retention.

 

The buyback is the most significant step. Facebook’s rationale is clear. It has over US$10 billion of cash and investments on its books, and has been solidly profitable for some time. With the stock unfairly thrown on the trash heap by investors, the company thinks it makes sense to use cash to settle a US$1.9 billion tax obligation related to restricted stock issued to employees. Proceeding with a secondary offering would probably also require the new equity to be sold at a discount or possibly even result in a pulled offering, given the sour sentiment surrounding the stock. Yet Facebook’s stock is down significantly because its initial public offering was so overpriced. Even with the fall, it still trades at more than 40 times earnings. This action reduces dilution, but comes at a high price. Moreover, the 101 million shares will be eligible for grants as new stock rewards under the company’s 2012 incentive plan. As large numbers of new employees are now underwater on their stock grants, the risk is the shares will need doling out anyway. Facebook’s buyback could signal the end of its four-month fall from grace. But with 1.2 billion more shares up for grabs and eligible for sale by the end of the year, there’s a good chance the shares have further to fall, continuing Facebook’s series of missteps as a public company. (Reuters)