Facebook Should Announce a Reverse Stock Split

Published on October 3, 2010

With the opening of The Social Network this weekend, Mark Zuckerberg is receiving unwelcome attention regarding the early days of Facebook and the revelation of some potentially embarrassing personal stories from his past.  Mr. Zuckerberg recently donated $100 million to the Newark, New Jersey school system and there has been a debate over whether the timing of the donation was intended to deflect attention from the film’s unflattering portrayal.  However, despite any sketchy details that have emerged about Mr. Zuckerberg’s past, a decision made just last week should be much more embarrassing.  The question involves whether Mr. Zuckerberg expects his employees to understand basic mathematics.

Facebook has announced a five-for-one split of its stock as the shares have risen to as much as $76 per share on private exchanges.  Although Facebook is not publicly traded, employees and others who own shares have been able to produce some liquidity by selling shares on private exchanges to those who are making a bet on a future successful initial public offering.

According to a source quoted in The Financial Times, Facebook is attempting to bring the stock price down to a level more consistent with other private companies.  The motivation?  According to Brian Erb, an attorney at Ropes and Gray specializing in assisting private companies with pricing their stock, Facebook may want to attract employees with larger share grants:

“The stock price has gotten so high that optically the number of shares probably isn’t looking too great to new employees,” said Mr Erb. “People would rather have 1,000 shares worth $10 than 100 shares worth $100.” Mr Thaw [a Facebook spokesman] said the split – the third that Facebook has given its shareholders – “gives larger grants to employees without dilution to existing shareholders”.

Facebook has indicated that an initial public offering is not imminent and the company is trying to discourage employees from selling shares on secondary markets.  Therefore, the stock split is most likely due to a perceived need to attract and retain employees with larger share grants. There seems to be little else that would motivate management to take this action.

The question is:  Why would Facebook want to hire or retain employees who cannot perform basic math?

As our readers know, the value of a company is independent of the number of “slices” it is divided into.  Cosmetic changes such as stock splits may allow Facebook to grant an employee 500 shares rather than 100 shares, but the only motivation is to mislead since the intrinsic value of the grant remains the same. The notion that technology employees like large share grants accompanied by lower per share prices is also dubious given the high share prices of Google and Apple.

If Mr. Zuckerberg wishes to increase the quality of his labor pool, he should announce a 1-for-10 reverse split.  Those who resign due to the horror of suddenly holding options on 1/10th of the shares were probably not creating much value to begin with. This would be a modern version of the famous math test that Warren Buffett used to give to all job applicants at Berkshire Hathaway (see Of Permanent Value, pages 277-278).

Facebook Should Announce a Reverse Stock Split
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