Bailout

Why is Facebook splitting its stock?

By Felix Salmon

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?

Full post as published by Macroprudential on October 01, 2010 (boomark / email).