Facebook Splits Stock, 5 to 1

http://online.wsj.com/article/SB10001424052748703859204575526161933614240.html?mod=WSJ_hps_SECONDTopStories

by sportsTAKES • 16 years ago

17 15 16 years ago

online.wsj.com

ghshephard3• 16 years ago

So, the following comment was made: "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."

Now, a reasonable argument can be made that once shares start to be worth more than $10,000 - and certainly in the case of outliers like BRK-A (currently at $124,015/share), there is an argument for a split (or, in the case of BRK, a tracking stock - BRK-B) - simply to prevent the creation of pools that allow people who don't want to buy $10,000 in a single stock to participate. (I think that's why Warren had BRK-B created)

But, facebook is trading in the secondary markets (sharespost) at $72. Even assuming they double in value, that would suggest a price that anyone who wanted to purchase, could do so.

So, clearly, there is another reason as to why this stock is being split - and I don't put much merit in the "When a stock is split, it shows an increase in value" - I have far too much faith in the efficient market to put much belief in that nonsense.

My theory, is that there are other, secondary benefits from splitting a stock. My two guesses are:

o Bankers get to book a bunch of revenue from splitting the stock and the paperwork that goes with it, so they sell mgmt on the idea.

o Some legal advantage to splitting shares, and possibly doing an inventory of all the stock certificates outstanding, getting an audit of the shareholders, etc...

Is there anybody that has been on the decision making team for a stock split that would like to weigh in on this one?

gte910h• 16 years ago

Couldn't they just be trying to keep the share price down in the ultra affordable range, so people will gamble with it upon IPO?

ktsmith• 16 years ago

If the IPO is not till 2012 then why split it now when the price could simply go back up to current levels in the mean time.

ghshephard3• 16 years ago

That's the "Market Cap will be higher if Stock Price is smaller" theory that I'm not a huge fan of.

If it were true, then there would be a _great_ arbitrage opportunity for efficient market practitioners who were instead focused on ROE/ROI/Cashflow principals of stocks that had excessive value because they had been "split."

In the short term, market is a voting mechanism, long term it's a weighing device. The major challenge is trying to differentiate between the two - but Market Splits would seem to be custom designed to be 100% voting bias.

guelo• 16 years ago

Another benefit is the ability to grant new clueless employees a more impressive-sounding number of options.

gojomo2• 16 years ago

Yep, "1000" sounds more impressive than "200" (even if those 200 would have been at 5X the price).

bretthellman• 16 years ago

500 shares sounds a lot better than 100... important for hiring top talent... What's really fascinating is the secondary market. Sharespost must be loving this.

austinalter• 16 years ago

Would "top talent" really be that bad at simple math?

wooster• 16 years ago

Yes. You'd be surprised at how many people can tell you the number of options they have, but not the percent of the company/equity/employee pool those options represent.

asmithmd1• 16 years ago

Reminds me of my local pizza shop: "If you are extra hungry we will gladly slice your pizza into 16 pieces instead of 8"

Facebook Splits Stock, 5 to 1

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