Facebook Is Selling Stock For Some Reason
Facebook is selling around $1.5 billion worth of stock today despite this:
And also this:
Our principal purpose for selling shares in this offering is to obtain additional capital. We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds planned. Additionally, we may use a portion of the proceeds to us for acquisitions of complementary businesses, technologies, or other assets.
Pending other uses, we intend to invest the proceeds to us in investment-grade, interest-bearing securities such as money market funds, certificates of deposit, or direct or guaranteed obligations of the U.S. government, or hold as cash.
So Facebook, which has $3 billion in cash and $6 billion in bonds,1 has decided it needs more money so it can go acquire some more cash and bonds. Because yields are so attractive right now. This is a delightful piece of reverse financial intermediation; Facebook will take capital from investors who want equity exposure to an internet stock and use it to buy Treasury bonds.
What is going on here? Well, Mark Zuckerberg is selling $2.3 billion of stock too, and you could imagine that Facebook wants2 to support him: "We are raising money for good secret stuff, and also Mark's selling a few shares," is perhaps a better message to the market than "here is an offering that is just our founder and CEO dumping some stock."3
Mostly, though, it's just an index add trade: Facebook is joining the S&P 500 tomorrow, so index investors want to buy. There is demand, so Facebook is creating the supply.4 You could view this as a shareholder-friendly convenience, albeit using sort of a weird definition of "shareholder": Facebook is being solicitous not to its current shareholders (some of whom would presumably be happy to sell into the higher prices caused by index demand without offsetting supply), but to its inevitable future shareholders. If index funds are going to take a chunk of your stock and stay a while, you might as well welcome them as pleasantly as possible.
Plus, of course, Facebook can get a pretty good price for its shares despite the pretty uninspiring reasons for the offering. After spending its entire first year as a public company trading below its May 2012 initial public offering price of $38, Facebook was trading at an all-time high yesterday, 46 percent above the IPO price. News of this offering has the stock down 2 percent or so, but presumably that number would be bigger without the index add. So as an opportunistic sale this is hard to beat. Whatever else you think of Facebook, it is unusual among public companies in its desire and ability to sell stock at local maximums. Most issuers are more into buying high and selling low.
Speaking of which! At current all-time high stock prices, most companies are more into buying stock. Or paying dividends, dividends are a big thing now. With corporate profits high and appetite for new investment somewhat muted, a lot of companies have no better ideas for what to do with their cash than to give it back to shareholders. Facebook is ... pretty much in the same situation? It's cash flowing $3bn+ per year, does "not currently have any specific uses" for new cash, and owns a lot of Treasury bonds. But, what the heck, it's bucking the trend and raising more money from shareholders anyway.5 If nothing else, you have to appreciate the novelty.
2 I enjoy anthropomorphizing companies as much as the next guy and probably quite a lot more, but let's not kid ourselves, of course Facebook is an aggregate that has no desires of its own. But it is controlled by Mark Zuckerberg. SO.
3 Also let's talk about Zuckerberg's sale for a minute? He did this in the IPO too, exercising an option to buy Class B (high-vote) shares and selling some Class A (low-vote) shares to pay the taxes on the option exercise. Lots of employee option plans allow for the sort of net exercise where the company withholds the taxes and just delivers you the net shares, rather than making you offer shares publicly to pay your own taxes, but that doesn't seem to be in Zuck's deal? I don't know. Also, he seems to be giving a bunch of shares to charity. Anyway his sale seems a little pointless too but, index add.
4 Casual Bloomberging of S&P 500 members finds that the Vanguard S&P 500 index fund owns about 0.9 percent of each, State Street's SPDR ETF owns about 1 percent, and BlackRock's ETF owns around 0.3 percent. So figure that those three will buy 2.2 percent of Facebook's float, and figure the float is the 1.9 billion shares outstanding after this offering minus about 500 million Zuckerberg-related shares and you get about 33 million shares of demand, or about half the offering, just from those three funds.
5 The non-cynical view -- which of course goes in a footnote -- is that Facebook actually has some good (though not yet disclosable) thoughts about what to do with $10 billion, and unlike other companies that are in capital-return mode it is not beholden to short-term public-market expectations of increasing earnings per share and capital return because it is run for the long term by a billionaire controlling shareholder with total control over the company. This is a perfectly respectable theory, though you have to pair it with the fact that Facebook is introducing auto-play video ads today. "Oh Facebook is full of good ideas and not focused on short-term earnings," you say, but I can't hear you over THIS AUTO-PLAYING VIDEO AD.