Facebook’s Drop Limits Goldman Sachs Gain as Lockup Ends

Facebook Inc. (FB)’s stock plunge has robbed Goldman Sachs Group Inc. and Microsoft Corp. (MSFT) of much of the potential gain they could unlock as soon as this week, when a ban on sales of insiders’ shares begins to lift.

While the end of the lockup has the potential to put additional pressure on the stock price, owners such as Goldman Sachs (GS), which now has a stake worth about $900 million, face a dilemma: whether to sell now and realize a smaller profit or sit tight and risk further losses.

“It’s not as if they have to sell all their holdings the moment the market opens,” said Brian Wieser, an analyst at Pivotal Research Group, who rates the stock a buy. “They want to be rational about this.”

Still, over the coming nine months, about 1.91 billion shares will be freed up, compared with fewer than 500 million now available for trading. That flood of shares is a deterrent for some potential buyers, said Herman Leung, an analyst at Susquehanna International Group, said.

“It’s one of the No. 1 issues on investors’ minds right now,” Leung said. “Even the investors that I talk to who want to buy the stock and like the company are not sure if they can stomach the lockups.”

Investors including Goldman Sachs, Microsoft and Accel Partners, which together control more than 200 million shares in the owner of the largest social network, can begin selling them on Aug. 16 for the first time since the May 17 initial public offering, according to a regulatory filing. It’s the first in a wave of lockup expirations in the coming months that will quadruple the number of shares that can be traded.

Google’s IPO

Microsoft, based in Redmond, Washington, will probably hang onto its stake after the lockup-ban lifts, a person with knowledge of the matter said on Aug. 10. Microsoft views Facebook as a strategic partner in the combat against Google Inc. (GOOG), rather than as a near-term moneymaker, said the person, who requested anonymity because the plans are private.

Facebook, worth $52.2 billion, has lost more than $40 billion in market value since the IPO, making it the worst performer among all large IPOs on record, according to data compiled by Bloomberg.

Shares of the Menlo Park, California-based company fell less than 1 percent to $21.60 at the close in New York.

Ashley Zandy, a spokeswoman for Facebook, declined to comment, as did Andrea Raphael, a spokeswoman for Goldman Sachs.

Facebook’s post-IPO plight contrasts with the experience of Google Inc., which held its IPO in August 2004. Google, the most valuable U.S. Internet company, rose by more than 70 percent within two months and more than doubled by the end of that year. While shares declined on the days following expirations in November and December of that year, on the day the biggest lockup ended, Feb. 14, 2005, shares rose 3 percent.

Lockups End

Facebook will have several lockup expirations. The first, on Aug. 16, is for stockholders other than Chief Executive Officer Mark Zuckerberg who sold some of their shares in the IPO. Then other shareholders, including employees, will be able to sell at later dates. A final round comes in May 2013.

Some of the concerns voiced by Leung are confirmed in research that has looked at how stocks perform when shares are unlocked, said Anant Sundaram, a professor at Tuck School of Business at Dartmouth. That’s especially true of venture-capital backed companies, which often have the steepest declines when lockup periods wind down, he said.

Facebook shares have declined 43 percent since the IPO, and the stock has failed to close higher than the IPO price of $38 since its first day of trading. The company had initially proposed a trading range of $28 to $35 before the number of shares in the IPO was boosted, as well as the price itself.

Already Declined

The stock has been weighed down by concerns over growth, which were amplified by the company’s inaugural earnings report as a public company. Second-quarter sales grew 32 percent, down from 45 percent in the previous three months, figures released last month showed. The shares have lost 20 percent since the July 26 report. Revenue is forecast to rise 29 percent in 2013 and 28 percent in 2014, according to the average estimate of analysts compiled by Bloomberg.

The stock’s drop has been large enough to give investors second thoughts about selling now, Sundaram said.

“Will there be a significant downward move?,” he said. “Probably not, would be my guess, given that stock has already fallen quite a bit.”

Little Incentive

The prices at which shares held by employees, insiders and other investors can vary widely, meaning some would profit from by selling shares even now. Microsoft acquired its stake -- currently worth $566.5 million -- in 2007 at a $15 billion valuation, while venture-capital firm Accel Partners invested in 2005, when Facebook had a value of about $100 million. Its stake is now worth about $2.93 billion. The Goldman Sachs investment valued Facebook at $50 billion.

Pivotal’s Wieser estimates about 55 percent of the 268.1 million shares that are liberated by Aug. 16 could be sold as some investors seek to secure gains. The remaining 1.66 billion shares are released at later dates.

“If the stock were up at $80, I think you’d see much more activity,” said Lise Buyer, principal at Class V Group in Portola Valley, California. “The stock is so far below where the IPO was.”

Other large early investors include Mail.ru Group Ltd., a Russian Internet company, and Digital Sky Technologies, a Russian investment company. Individuals with large stakes include Facebook co-founder Dustin Moskovitz and Mark Pincus, chief executive officer of Zynga Inc.

Venture Capitalists

After lockups end, shares at some venture capital firms may automatically be distributed to the firms’ own investors, and that could create more selling, said Jay Ritter, a professor of finance at the University of Florida.

Firsthand Technology Value Fund Inc.’s lockup expires toward the end of this year, said Chief Executive Officer Kevin Landis. The fund bought shares from October 2011 to March 2012 at an average cost of $31.50 -- about 46 percent higher than the current price. Landis said that while it’s difficult to predict what he’ll do, he plans to exercise restraint.

“We would try to be a little bit more disciplined about it,” he said. “If the company’s doing well, and the company’s putting up good numbers, and they’re making progress against their plan, there’s something to be said for just waiting for the dust to settle.”

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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