Opinion

Felix Salmon

Why is Facebook splitting its stock?

By Felix Salmon
October 1, 2010

Paul Kedrosky is right: this is very weird.

A Facebook spokesman told Reuters on Friday that Facebook will enact a 5-for-1 split of the company’s shares…

Part of the reason for Friday’s split, said Facebook spokesman Jonny Thaw, was to help reduce the price of Facebook’s shares, which have risen significantly in recent years.

Stock splits normally take place because of concerns about retail investors, who sometimes don’t like being forced to buy stocks in multiples of more than $50 or so. But retail investors aren’t allowed to buy shares in Facebook, which trade in an opaque secondary market with fewer than 500 participants.

If Facebook stock was trading at thousands of dollars per share, the split might still make sense — if you’re handing out stock or stock options to relatively junior employees, for instance, a single extra share can make a substantial difference. But it’s not: the highest reported figure for Facebook stock is just $76 per share. A 5-for-1 split would bring that down to just $15 per share: there seems to be no particular reason to have a share price that low.

It’s possible that the $76 figure is wrong by an order of magnitude or so: that might explain the split. But absent that explanation, I can’t think of any good reason for this split, unless an IPO is much more imminent than anybody currently thinks. Can you?

Comments
4 comments so far | RSS Comments RSS

Mark Zuckerberg: We are going to give you $100 million in stock. The stock is trading at $75 a share.
School Administrator: Wow! That’s… um, very many shares.
MZ: Yeah, a little over a million.
SA: Wow! How could you tell?!
MZ: Because 75 goes into a hundred about 1.3 times
SA: Really?!
MZ: Yeah.
SA: Could you go over that again?
MZ: OK forget it, we’ll just split the stock!!!

Posted by johnhhaskell | Report as abusive
 

A privately held company that is growing fast and needs to offer options to attract employees will split its shares so they can still offer large numbers of options to new employees. The later you join a start-up (if Facebook can be considered a start-up), the less percentage of the company you will get in shares. However, new, young employees rarely think in terms of percentage ownership, they only care about how many shares they are receiving. So if the company is worth 5x as much as it used to be, they would have to offer 1/5 the number of options they used to offer. Getting options for 1,000 shares (pre-split) doesn’t sound as good to the employee as 5,000 post-split shares. Even though most of these employees are engineers, they rarely take the time to think about thing like percentage of the company and market cap, they focus solely on absolute numbers.

Posted by OnTheTimes | Report as abusive
 

Facebook are looking at going public after 2012. I think the reasons for the split is that the stock will be more marketable. 2] They will be able to spread the shares better if its split. To trade easily you need at least 100 shares.In general when shares of top companies are split the sum of their value increases. It becomes more accessable to a greater percentage of the investing public. Facebook has an agreement with current investors that it will seek a stock market listing .
News As It Breaks

Posted by warriorone | Report as abusive
 

IntellectualExchange.com

Your stock is rising.

Posted by wes26 | Report as abusive
 

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