Elevation Buys More Facebook Stock — Helping Employees Take Cash off the Table?

Technology-focused private equity firm Elevation Partners has bought 5 million stock shares from Facebook for $120 million, according to a recent letter it sent to limited partners, obtained by TechCrunch. The amount follows Elevation’s reported purchase of 2.5 million Facebook shares for around $90 million last fall.

The numbers suggest a decrease in the value of Facebook’s shares, a confusing (and likely inaccurate) result of Elevation’s complex deal-making.

Facebook is on track to make more than $1 billion this year, as we’ve projected and as the company has sort of confirmed. It is also busy hiring in the US and around the world. Given its revenue growth, and the hundreds of millions of dollars it has raised over the course of its six-year existence, the new funding wouldn’t seem to be necessary, unless the company has an exceptionally aggressive operations growth plan. Or maybe this money is for a rainy day?

The other thing is that, on its face, 5 million shares for $120 million means $24 per share, while 2.5 million for $90 million implies $36 per share. Why is Elevation getting a 33% discount on this latest purchase, at a time when Facebook appears to be gaining in value?

One explanation for the apparent price drop could be that, last fall, Elevation was buying preferred stock intended for investors, whereas it is now buying less-expensive common stock. Like other companies Facebook has issued common stock to employees, and it has been letting them sell a portion of their holdings to select investors — the point is to keep them happy as it ignores the option of an initial public offering.

Preferred stock is typically more expensive than common stock, because it comes with special rights, like the ability to sell first in the event of an acquisition.

The problem with this explanation is that Elevation was reportedly buying common stock last fall, not preferred stock. We doubt that Facebook is selling either common or preferred stock at a lower price today than what it was selling common for last fall. So perhaps the reported stock sale prices are not accurate? This seems to be the case.

Here’s what we think is happening: Elevation has been buying only Facebook common stock, last fall and now, at prices in the low $20s per share.

A supporting piece of evidence for this explanation is that Facebook has been trying to carefully control the sale of stock to third parties — it recently prohibited current employees from selling to third parties on secondary markets, for example. Instead, Facebook’s deal with Russia’s Digital Sky Technologies last year allowed the investor to purchase large chunks of current and former employees’ common stock. It appears that Facebook is doing the same thing with Elevation, now.

One final note: It may have also bought preferred stock, or gained options to buy stock at a later date; it has also been buying in tranches. Given the incomplete picture available, we may not know exactly what Elevation is getting until Facebook eventually goes public and its ownership stake is revealed in public filings.

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