With 500-Shareholder Concerns Gone, Will Facebook Make Big Acquisitions?
At the stroke of midnight this New Year’s Eve, Facebook’s financial gurus must have breathed a sigh of relief. It was a new fiscal year, 2011, which meant an end to the days of stressing about having 500 shareholders.
Staying at 499 shareholders or fewer is something Facebook has worried about since at least 2007, and sidestepped by creating a special kind of restricted stock unit for new employees and making small talent acquisitions that avoided, when possible, awarding start-ups and their investors with Facebook stock.
Now that that’s over, Facebook’s acquisitions team may get the go-ahead this year to pursue larger and more complicated deals.
As is now widely known, SEC rules mandate that a company with more than 500 shareholders at the end of a fiscal year must report financial information, something Facebook didn’t want to do as a private company. But if you read the fine print, as BoomTown’s Kara Swisher first reported, Facebook has 120 days to disclose from the end of the fiscal year in which it crosses 500 shareholders.
Basically, Facebook has exorcised a curse hanging over its head by outlasting it. Like a nightclub bouncer, the company had been letting one shareholder out of the room before allowing another in. And now that’s over, as long as Facebook goes public next year.
(Though at this point, many of the company’s financial details are already leaking out as part of the troubling Goldman Sachs deal.)
For now, Facebook is still being cautious about adding shareholders; the Goldman deal (which we’ve heard still hasn’t closed) was structured to combine Goldman’s wealthy clients into a single entity to avoid adding too many shareholders.
Facebook’s corporate development team has said publicly that part of why it likes doing “acqhire” deals of small, early-stage start-ups is because they are relatively uncomplicated, financially speaking. Wherever it can, Facebook tries to cash out an acquired start-up’s shareholders instead of giving them stock. In the past, if a start-up had too many shareholders, it might not have been an attractive acquisition candidate.
Facebook doesn’t always get its way on that preference; sometimes it pays in stock. For instance, Facebook bought two start-ups that had taken investments from RRE Ventures: Hot Potato (in August 2010) and Drop.io (in October). In the first case, Facebook paid RRE in cash, but the second time around, RRE was able to negotiate for stock.
But now that Facebook seems to basically be giving itself the go-ahead to surge past 500, who gets to be shareholder number 501 or even number 1,001? It’s possible they could be the employees and investors in larger, more complicated M&A deals. Facebook’s name has come up in acquisition discussions for companies like Twitter and Foursquare, but now it may actually start closing more of those deals.
To date, Facebook’s largest acquisition has been FriendFeed for $50 million in cash and stock in 2009. The first time many tech watchers heard of the 10 tiny start-ups Facebook acquired in 2010 was when the deals closed.
But now that big deals are on the table, the question is, who’s next?
Here’s Jon Stewart of “The Daily Show” last night ranting about Facebook avoiding making financial disclosures:
|The Daily Show With Jon Stewart||Mon – Thurs 11p / 10c|
|The Anti-Social Network|
Please see my own disclosure about Facebook in my ethics statement.