Source: USA TODAY
SAN FRANCISCO — The recent stock-price history of Internet firms that conduct secondary public offerings is worth a look, now that Facebook has said the company and its executives plan to sell a combined 70 million shares.
That history suggests Facebook shares will underperform the Nasdaq in the near future, as the shares of LinkedIn and Yelp have done since their secondary sales earlier this year.
Going back to 2012, the history is even more bearish for Facebook shareholders, as both Angie’s List and Zynga saw huge price drops in the wake of their secondary offerings that year.
Such offerings are usually not good for common shareholders for two reasons.
First, and most obviously, their stake gets diluted when a company issues new shares, or when executives convert their options or restricted stock grants into common shares for sale.
Shares being sold by Facebook will add to its already-massive fully-diluted share count of 2.5 billion and will decrease the company’s per-share earnings by just over 1%.
More importantly, insiders have detailed knowledge of a public company’s near-term prospects and thus are in a better position to know when to sell.
Facebook CEO Mark Zuckerberg plans to sell more than 41 million shares in the new offering.
That’s a third more than the 30.2 million shares he sold in the company’s IPO back in May 2012.
Close watchers of the company will remember in September 2012, Zuckerberg publicly pledged not to sell any more Facebook shares for at least one year.
That helped put a floor under the company’s stock price, which at the time was plumbing record lows below $18.
In fact, the stock rallied 60% in the three months following Zuckerberg’s show of confidence while the Nasdaq was flat during that same time as savvy investors followed his lead.
Now, with the shares trading around $54, he’s pulling the trigger on a large share sale.
According to Facebook, the majority of Zuckerberg’s proceeds from the sale will be used to pay taxes he will incur by exercising an option to purchase 60 million Class B shares.
Even so, the company itself is also selling another 27 million shares, which at a share price of $54 would raise $1.46 billion.
Given that the company had cash and marketable securities of $9.3 billion as of Sept. 30, investors may want to ask themselves whether Facebook really needed the extra money, or thought this was a good time to sell stock.
Back in September, LinkedIn said it would sell $1 billion worth of new stock, or just over 4 million shares.
The shares fell as much as 15% during the next three months and are now down 11% since the day the offering was announced. The Nasdaq is up 13% since then.
Yelp is down 5% since it said on Oct. 29 that it would sell additional shares, while the Nasdaq is up 4% during that time.
Angie’s List shares sank 30% in the six months after it conducted a secondary offering in May 2012, versus a flat performance for the Nasdaq.
Finally, Zynga in late March, 2012, conducted an offering that was perhaps the most disastrous Internet secondary in recent memory.
Priced at $12 for the offering, the shares crashed 80% during the next nine months and are still trading more than 60% lower, at $4 each.
While no one is expecting Facebook to follow a similar trajectory, recent history suggests its shares will have a tough time outperforming the broader market for tech stocks in the wake of its offering.
John Shinal has covered tech and financial markets for 15 years at Bloomberg, BusinessWeek, the San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.
Copyright © 2013 USA TODAY, a division of Gannett Co. Inc.