Why Is Facebook Splitting Its Stock?

The news today is that Facebook is splitting its (privately held) stock 5-to-1. Felix Salmon wonders why:

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?

I wouldn’t be so quick to dismiss pressure from junior employees about the share price. When you deal with investing at the retail level, price level is perhaps the strongest cognitive bias there is.

People just don’t like buying stocks over $70 per share no matter what the quality is. The average retail investor just loves to find stocks in the teens. I know it makes no sense, but I’ve seen it again and again.

One of the reasons Microsoft went public, and Bill Gates was in no hurry, was that junior-level employees were becoming rich on paper but there was no place for them to sell their shares. The point is that even non-public companies can come under pressure about their share price.

My advice is to never worry about the nominal price of a stock. Pay far more attention to the company’s business and financial ratios.

Posted by on October 1st, 2010 at 4:03 pm


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