Downward Trend of Facebook Is a Downer for the State

Facebook shares hit a new low July 31 — $21.71, 43 percent below its initial public offering.

This isn’t good new for the state, which hopes to bank a healthy chunk of tax receipts from stock sales the distribution of 240 million Restricted Stock Units to Facebook’s 3,000 employees as early as November.

Lower share price, lower rake-off for the state.            

Both Gov. Jerry Brown’s Department of Finance and the Legislative Analyst predict a share price of between $35 and $45 in November when those RSUs, as they are known, get handed to employees.

While still three months until November – a lifetime on the stock market — $35, let alone $45, seems a hard climb from $21.71 especially given the stock’s steady downward movement since going public May 18.

A string of bad news for the social network giant has aided the downward fall. Worries about growth chief among them.

UBS, the Swiss bank, said it planned to sue NASDAQ for mishandling the IPO after taking a $356 million hit from the sale that caused a nearly 60 percent decline in second quarter earnings.

Words like “botched,” disappointing,”  “failed” and “dismal” performance” now routinely modify the IPO and the stock’s performance.

The Legislative Analyst predicted a share price of $45 in November that would yield tax revenue of $2.1 billion.

If Facebook’s share price is $21.71 in November that estimate falls by 52 percent to just over $1 billion.

The state will still collect the taxes on the 60 million stock options worth $2.3 billion exercised by Mark Zuckerberg 10 weeks ago.

Finance expects to collect $200 million from Facebook’s founder during the fiscal year that ended June 30.

Jason Sisney of the analyst’s office told Capitol Weekly in a June 18 interview:

“State budget forecasts are always based on assumptions — either explicit or implicit — about stock market performance.  What’s unusual this year is that, besides the usual stock market uncertainties, we had this enormous uncertainty about one particular stock.  We know the state will get substantial revenue related to the IPO but the question is how much.  We still don’t have a precise answer to that. By November, we’ll have a better idea.” 

That uncertainty could be one reason the Department of Finance took a more conservative view of revenue derived from the IPO – an upside is always better than a downside. 

Facebook’s shares will trade at $35 in November, Finance predicts in its estimates. The department also assumed the stock would initially sell for $35 instead of the $38 it actually did.

Under Finance’s model, the state will receive $283 million in Facebook-related taxes during the fiscal year that ended June 30, including the $200 million from Zuckerberg.

Another $1.2 billion will be received in the current fiscal year, mostly from the withholding paid as part of the RSU transactions in November.

If Proposition 30, the Democratic governor’s temporary tax increase proposal, passes in November with its three higher brackets for the state’s wealthier taxpayers that would generate another $400 million for the state.

Again, based on a $35 share price in November.

Erring on the side of caution, Finance doesn’t count the $400 million in its revenue total.

The analyst assumed a $38 IPO price and predict the share price climbs to $45 in November yielding $2.1 billion in tax revenue between now and June 30, 2013, the end of the next fiscal year.

A wild card not included in in the revenue estimates of either Finance or the analyst is what Facebook’s previous 1,000 shareholders do with the 1.9 billion Facebook shares they held as of December 31, 2011.

Most of the shares, 1.1 billion, are concentrated in the hands of company executives, directors and investors holding a 5 percent or greater ownership stake.

USA TODAY reports that 91 days after the IPO – August 16 – “insiders, such as company officers, directors and employees” can sell 268 million shares of their stock. Another 137 million of those shares can be sold between August 16 and November when the RSUs are released.

“Given the stock’s plunge so far, investors are braced for an avalanche of available shares from insider sales, putting more downward pressure on the stock price,” USA TODAY concludes.

Finance and the analyst hypothesize that the major investors will likely divest themselves of at least some of their holdings.

So might executives and other shareholders, just as Zuckerberg swiftly sold 30.2 million of his shares after the IPO for a cool $1.1 billion.

 “That presents the possibility for a large amount of capital gains, much of it likely attributable to California residents,” says a Finance memo analyzing the IPO’s revenue effects.

According to one estimate, if 25 percent of that stock is sold and 75 percent of the sellers are California residents with a gain of $25 per share, the state could reap $800 million or more in additional taxes.

But does a sale price in the low $20s or maybe even high teens drive stockholders to cash out as much as they would at $35 or $45 a share?
Unlikely.

As Sisney says, the state will know more in November but so far the news isn’t good.

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