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Facebook shares plunging as insiders start to sell

12:02 PM, Aug 16, 2012   |    comments
IPO day: CEO Mark Zuckerberg, center right, as the Nasdaq opens on May 18.
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(USA TODAY) -- Facebook's stock plunged to a new low Thursday after the expiration of a ban that had prevented some early investors and insiders from dumping millions of additional shares they own in the social-networking leader.

Facebook (FB) stock traded as low as $19.69 this morning before bouncing back to $19.91 in midday trading Thursday. That's still 6% down, or $1.29, from Wednesday's close and about 48% below its initial public offering price of $38. If the stock hits $19, it will have lost half its value since Facebook went public in May.

By noon, nearly 100 million shares had traded - more than three times the average volume on a full day.

Firms ranging from Accel Partners to Goldman Sachs, Zynga CEO Mark Pincus and Facebook board members James Breyer, Peter Thiel and Reid Hoffman were among those free to sell stock they own, after the lifting of a ban known as a lock-up period. If many of them took advantage of that, Facebook's stock could decline because the market would be flooded with nearly two-thirds more shares.

It's not known whether any of those investors have sold any shares. The stock price decline could also be reflecting other investors' anticipation of selling by those insiders.

On Tuesday, shares of online review service Angie's List suffered the biggest one-day drop and closed at a new low following the expiration of a similar ban. The price dropped, even though there was no word on whether any major investors had dumped their shares.

It's been a rough run for Facebook. After one of the most-anticipated IPOs in history, Facebook suffered what may be the most-botched public offering as trading glitches marred its first day. It's been almost all downhill for the Menlo Park., Calif., company since then.

Investors have been concerned about Facebook's ability to keep increasing revenue and make money from its growing mobile audience, even as many analysts hold positive long-term views.

Those eligible to sell stock on Thursday were the investors and directors who had participated in the May IPO. The exception was CEO Mark Zuckerberg, who will be ineligible until November. Microsoft, an early Facebook investor, was eligible to sell, though it was unlikely to do so because of partnerships it has with the social network.

Lock-up periods prevent insiders from unloading shares too close to an IPO and can help prevent volatility that might occur if too many shareholders decide to sell a newly traded stock all at once. They generally start to expire 90 days after a stock makes its public debut. Thursday marked 90 days since Facebook's began trading publicly on May 18.

Other shareholders, including many Facebook employees, will be able to sell beginning in October. The last lockup period expires next May, a year after the IPO.

"You're going to see a lot of volatility," says Scott Kessler of S&P Capital. IQ. "People could sell, and investors are worried about that."

Lockup expirations are significant events for all IPOs. Facebook's might be more noteworthy due to:

Recent lockup troubles. Investors who think stock prices accurately price in looming lockups ahead of time got a reminder this week that that's not always the case. Shares of online review site Angie's List sank nearly 16% Tuesday after shares that had been locked become available.

An even bigger deluge is coming. Thursday's lockup is just the first in five expirations. Today, 271 million shares were freed up. Another 247 million shares are unlocked on Oct. 16, and a deluge of 1.2 billion shares come on Nov. 15. "I've never seen lockup periods with so much stock," says Francis Gaskins of IPOdesktop.com

Investors are focused on the lockup. The lack of a positive surprise in Facebook's second-quarter results and little forward guidance leave investors with just lockups to think about, says Mark Harding of JMP Securities. "The next big event is this lockup."

But while the lockup expiration is certainly capturing investors' attention, analysts are torn on what the reaction will be.

The expiration is unlikely to have any significant long-term effects because the stock is so depressed, Harding says.

Many of the large investors who bought the shares when Facebook was private in 2011 and early 2012 would take losses if they sold, he says.

The average price in early 2012 was $40 a share. The shares closed Wednesday at $21.20. Despite the looming lockup, S&P Capital IQ's Kessler upgraded the stock to a buy this week.

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