Tuesday, September 4, 2012

Henry Blodget Misinterprets Facebook's 8K...

As my disclaimer suggests, I think that it is important for readers to always check sources and research the articles that they read. Simply because someone has a good reputation or a blog that gets a ton of hits, doesn't mean that they don't put something out there that isn't true. I would argue that the vast majority of the time, these mistakes are unintentional. While I would imagine that is the case here with Henry Blodget, the point remains that you should always get in the weeds, so to speak, and do your own work.

Henry Blodget, who I generally enjoy hearing thoughts from on various videos on Yahoo! Finance and such, wrote an interesting article on the recent 8K from Facebook. In it, he made some claims that are not entirely true and one that is totally false. For example, he said that 2 directors will soon be selling stock to cover their tax bite from the IPO, when the 8K actually said that they "intended" to sell the shares to cover their taxes.

Though, there are a few things that he, in my mind, missed the point on, which while nuanced, are a bit deal. The first is that he wrote that "Mark Zuckerburg will not sell anymore stock for at least a year." However, the actual text of the 8K reads:
"Mark Zuckerberg has not adopted a Rule 10b5-1 Plan and has informed us that he has no intention to conduct any sale transactions in our securities for at least 12 months."
Having no intention to sell and and actually committing to sell (or not sell) stock, as was referenced by Blodget to an article by John Yarow, are two totally different things. Though, I admittedly have no reason to not believe these individuals will not follow through with there intentions.

These two points, are nitpicking. However, I have seen instances where intentions became something completely different. Plus, these first two points are indicative of an even greater problem in the article that is totally false.

The meat of the misinterpretation is where he states the following"
"Facebook is about to do a huge stock buyback, at less than half of what it received for its shares at the IPO four months ago!
No, you probably didn't catch that.
And you can be forgiven for not catching it. Because the filing didn't say anything about a buyback.
But, it's true:
By deciding to withhold 101 million shares of the employee stock grants and pay its tax bill with cash on the balance sheet, Facebook is effectively buying back those shares and retiring them. At $19 per share, the tax bill will amount to $1.9 billion, and the 101 million shares are worth about $1.9 billion.  So Facebook will effectively be using $1.9 billion of cash to buy back its own stock."
He later says the following:

"Now, to be clear, Facebook isn't going to go into the open market and buy back $2 billion worth of stock. It's going to retire the stock it withholds from employees and then give the cash value of these shares to the government."

Notice how he makes reference to them "retiring" the shares? Well, that may the effect for the short run in regard to shares outstanding, but when reading the 8K, you find that the company doesn't seem to have any (for lack of a better word) intention of retiring them:

"The 101 million shares that are withheld by us as a result of the net settlement of Pre-2011 RSUs will no longer be considered for accounting purposes to be issued and outstanding, thereby reducing our shares outstanding used to calculate earnings per share. These 101 million shares will become eligible for granting as new awards or shares underlying new awards under our 2012 Equity Incentive Plan." (Italics and underlining mine)

So there you have it, the company probably isn't going to retire them at all. They are probably going to award them to executives and employees in the coming years as compensation. If the company truly is undervalued, then, retiring the shares would be a great move. As was the case a while back, I am still not convinced that they are in anyway cheap... Instead, this just seems to be a great move for company executives, at the expense of a bunch of people who must have thought Facebook could take over the world. As a side note, both of the portfolios that a buddy and I constructed by throwing darts at a Wall Street Journal have kicked the ever loving shit out of Facebook's stock. Time will tell if that trend will continue, but I am betting it will.

In closing, after writing ~95% of this, I just scanned the comment section of the article and realized that someone beat me to the punch with the point that I was in regard to the retirement of shares (how's that for honesty?)... That said, I still thought that this would be an interesting post to put up for you all.

Disclosure/Disclaimer: I have no position in anyregard to Facebook, but am a user of it. I reserve the right to change my position at any time. This is nothing more than my opinion. You should always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

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