Facebook buyback

jamesmith

As we discuss in here: http://hutong9.net/forum.php?mod ... 3&fromuid=11178  the worry about Facebook is a bunch of restricted shares will go to market in November. There's update on this matter. Here's a section from Lex Column yesterday:



Sell for 38, buy for 18. A brilliant trade, surely? But as with everything else about Facebook, its de facto buyback is a bit more complicated than that.

Headlines focused on the disclosure that boss Mark Zuckerberg "has no intention" to sell shares in the next year (how will he make the rent?); the buyback news was more substantive. A block of restricted stock units issued to employees is set to vest in October, creating a big tax liability. Facebook had expected to withhold a chunk of the RSUs with the same value as the tax bill, issue new shares worth that amount and send the cash to Uncle Sam. The group now plans to pay the government out of cash on hand and its credit facilities, issuing no shares after withholding the RSUs. The new plan will reduce Facebook's diluted share count by 101m shares, or a bit under 4 per cent.

So it appears that the clever kids of Facebook, barring a move in the stock price, will be, in essence, buying shares at half the price it sold them for a few months before. But it is fallacious to put Facebook's decision about how to fund its tax bill in the context of its initial public offering. The IPO is, as it were, "sunk financing". The decision facing Facebook's leaders was whether or not to dilute shareholders after their shares had already lost half their value. The dilution option was a non-starter, especially given that the company has $10bn on its balance sheet and has burnt less than $200m in cash so far this year, despite prodigious spending. It is one thing for a media company to ice shareholders out of corporate governance, as Facebook has. It is another to spit in their faces as the world looks on.

Facebook is not trading cleverlyin its own shares, or looking after shareholders, or signalling confidence in the value of its stock. It is simply doing what it must.

jamesmith

I got some shares after the buy back news on 9/6.  At FB's previous quarter report, it listed one of its product highlight is deep integration with Apple. In a few hours we will see the highly anticipated Apple event and get more info on how well the integration is done.

Here's the live blog for apple event: http://www.engadget.com/2012/09/12/apple-iphone-5-liveblog/

Apple store website is down before the event, which hints multiple new products will be announced:


For anyone that's interested, here's the previous quarterly report: http://files.shareholder.com/dow ... ease072612FINAL.PDF

jamesmith

This article explained the buyback:

Facebook Announces Massive $2 Billion Share Buyback At Less Than Half Of The IPO Price*

Facebook just released an SEC filing that contained a whole bunch of nuggets of information, including the following:
Directors Marc Andreessen and Donald Graham will soon be selling some stock (enough to pay the taxes owed on their stock grants)
CEO Mark Zuckerberg will not sell any more stock for at least a year (he sold $1.1 billion at $38 on the IPO)
The company is accelerating the lock-up release for many employees to October 29. On October 29, 234 million employee-owned shares will become available for sale. (That will be an exciting morning.)
The company will withhold 101 million shares of stock (for tax witholdings) out of a total of 234 million shares that are owed to employees on October 25. These withheld shares will no longer be considered "shares outstanding," so the company's fully diluted share count and free float will be slightly lower than previously expected.
The company will pay the tax bill associated with the stock grants with its own cash or its cash from its credit lines.
The company will not do another stock offering in the next few months to raise cash to pay this tax bill.
Did you catch that?
Facebook is about to do a huge stock buyback, at less than half of what it received for its shares at the IPO four months ago!
No, you probably didn't catch that.
And you can be forgiven for not catching it. Because the filing didn't say anything about a buyback.
But, it's true:
By deciding to withhold 101 million shares of the employee stock grants and pay its tax bill with cash on the balance sheet, Facebook is effectively buying back those shares and retiring them. At $19 per share, the tax bill will amount to $1.9 billion, and the 101 million shares are worth about $1.9 billion.  So Facebook will effectively be using $1.9 billion of cash to buy back its own stock.
Smart companies sell stock when it's expensive and buy it back when it's cheap.
So those who are appalled by the idea that they just bought Facebook stock for $38 on the IPO four months ago only to see the company now turn around and use their cash to buy the stock back for ~$19 four months later can console themselves with the following:
Facebook management is being smart.
(That is unless the stock now plummets further, in which case Facebook will look like most companies that buy back their own shares—which is to say, stupid. But there's no way Facebook could have done a secondary stock offering at $19 after doing an IPO at $38 four months ago. So the company didn't really have much choice here.)
Now, to be clear, Facebook isn't going to go into the open market and buy back $2 billion worth of stock. It's going to retire the stock it withholds from employees and then give the cash value of these shares to the government. In so doing, it will spend about $2 billion and modestly reduce its fully diluted share count—to about 2.6 billion from 2.7 billion (which has exactly the same impact as a buyback).
And that means that, at $19 per share, Facebook is still valued at an impressive $49 billion.
(Another fun fact: Remember when Facebook raised the expected price of its shares on the IPO from $28-$35 to $34-$38 and then priced the IPO at $38 a share? Well, given that the company sold 180 million shares on the IPO, that ~$10 price hike raised about $1.8 billion of extra cash. So that pretty much paid for the whole buyback.)