Facebook Inc.'s 6.3 percent drop yesterday, after the end ofrestrictions on share sales by its biggest investors, was thesecond-largest post-lock-up decline among companies that have gonepublic since January 2011.

Only social-game maker Zynga Inc. tumbled more, losing 7.9percent, on the first day that insiders could start selling theirstakes, data compiled by Bloomberg show. That was the largestone-day post-lock-up descent among the 20 biggest initial publicofferings since January 1, 2011. The slump yesterday left MenloPark, California-based Facebook at a record low after a 60 percentincrease in the number of shares available for trading.

Under restrictions worked out with IPO underwriters, earlyinvestors agree not to sell their holdings for a preset periodafter a market debut to keep from flooding the market with shares.Facebook's decline reflects concern that more sales will follow inthe coming months as additional lock-ups expire and as the companystruggles to wring sales from a growing customer base, said RoryMaher, an analyst at Capstone Investments Inc.

“Anytime you have a lot of shares come out on the market likethat, it's going to put some pressure on the stock,” Maher said.“They're still figuring out the best way to optimize their corebusiness. And they haven't quite done that yet.”

Facebook, the world's largest social-networking service,advanced to the equivalent of $20.13 at 11:20 a.m. in Germantrading, after dropping $1.33 to $19.87 at the close yesterday inNew York.

The shares freed up yesterday represent 14 percent of the 1.91billion that will become available for sale in the coming ninemonths. The next expiry comes between Oct. 15 and Nov. 13, whenrestraints are removed on about 243 million shares. Lock-up expireson about 1.2 billion shares on Nov. 14, and for 149.4 millionshares a month later. A final round comes May 18, 2013, with 47.3million shares becoming available.

Early Facebook investors such as DST Global Ltd., Goldman SachsGroup Inc., Elevation Partners and Accel Partners could startselling part of their holdings yesterday, Menlo Park,California-based Facebook has said in filings. The restriction waslifted for early investors, excluding Facebook Chief ExecutiveOfficer Mark Zuckerberg, who sold part of their holdings in theIPO.

Facebook shares have lost 48 percent since the May 17 IPO. Evenso, some investors probably aren't convinced that the stock won'tfall further, said Erik Gordon, a professor at the Stephen M. RossSchool of Business at the University of Michigan.

Yelling 'Fire'

“It might not be rational for the shareholders to sell all atonce, but when someone in a theater yells 'fire,' people don't actrationally, they stampede to the exits,” he said. “It might befatal to your career to be viewed as the last chump to getout.”

Microsoft Corp., based in Redmond, Washington, will probablyhang onto its stake after the lockup-ban lifts, a person withknowledge of the matter said on Aug. 10.

Microsoft views Facebook as a strategic partner in the combatagainst Google Inc., rather than as a near-term moneymaker, saidthe person, who requested anonymity because the plans areprivate.

Other investors have been preparing for potential sales.Director Peter Thiel, who sold in the IPO, has given himself addedflexibility to unload more holdings, according to a regulatoryfiling. Thiel, one of Facebook's earliest investors, converted morethan 9 million shares to Class A from Class B. Class A shares areeasier to sell on the public markets.

Facebook has grappled with concerns about its valuation afterreporting sales growth of 32 percent in the second quarter from theyear-ago period, down from 45 percent in the first quarter and 55percent in the fourth quarter. The second-quarter gain was dwarfedby a surge in spending on marketing and sales, which ballooned to$392 million.

Part of Facebook's challenge is making money from the growingslice of users who access the social network over mobile devices.During the second quarter, the number of ads delivered in the U.S.dropped 2 percent from a year earlier even amid an increase intotal daily users.

Bloomberg News

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