Uncle Sam A Winner in Facebook IPO

May 28, 2012
By

There’s no shortage of losers in the Facebook IPO: Mutual funds that didn’t get the insider tip about the company’s sliding prospects; starry-eyed individual investors who jumped at the chance to buy shares above $40 in the first few frothy hours of trading; the reputation of the investment banking industry, which gave the general public one more reason to believe the stock market is nothing more than a rigged casino favoring the house – their house.

But after searching high and low, I’ve finally turned up two big winners from Facebook going public: the U.S. Treasury and the state where Facebook executives and key employees reside – California. Those governments will reap an estimated $4.6 billion in income taxes due from insiders who received over 400 million shares of stock as part of Facebook’s 2005 equity compensation plan. Stock distributed under such plans is taxed as ordinary income.

Now comes more bad news for customers of Morgan Stanley and the other investment banking firms that encouraged their customers to cough up $38 a share for Facebook, which is more than 70 times last year’s earnings. The company treasury will pay those taxes to Uncle Sam and the states on behalf of the stock-compensated employees, including Mark Zuckerberg, who reaped over $1 billion by selling 30 million shares in the offering and still holds over 27 percent, or about a half billion shares of the company (making him worth – at Thursday’s $32-a-share price – about $17 billion).

And where will Facebook, which only had $3.9 billion in cash and marketable securities on hand at the time of the IPO, get the $4.6 billion necessary to pay those taxes? The prospectus stated it plainly: “We anticipate that we will expend substantial funds (from the stock offering) in connection with tax withholding and remittance obligations related to the initial settlement of our restricted stock units” (the stock tied to the 2005 executive compensation plan).

In other words, Facebook raised $6.8 billion from the 180 million shares it sold to the general public in the IPO, and will spend more than two-thirds of that cash, much of it from the retirement savings of middle class Americans, on its wealthiest employees’ tax withholding. “That level (raised for taxes) is unusual,” said Michael Maryn, a partner at SNR Denton and an expert on executive compensation. “The real purpose of this IPO was to allow Zuckerberg and early shareholders to cash in on the value of Facebook. They’re cashing in their chips, so to speak.”

To be fair, the number of shares distributed under the stock compensation plan will be reduced by about 45 percent to offset the payments made to the Internal Revenue Service (35 percent high-end tax rate) and California (10 percent high-end tax rate). But the company still has to come up with the cash to pay the withholding: about $3.6 billion to the U.S. and $1 billion to California. It did so by selling shares to the public.

“It’s an unusual use (of capital raised through an IPO), but it is permitted,” said Walter van Dorn, also a partner at SNR Denton, who specializes in Securities and Exchange Commission law after working there as a regulator. “They have leeway to do what they want.”

The company admitted in its prospectus that it has no other real use for the money other than adding to its treasury for general purposes or to make acquisitions, none of which were tied to the offering.

The amount paid in taxes could go down, of course, which would leave more of the money raised from the public in Facebook’s hands. It will wait 151 to 180 days before paying the governments.

Though the shares were distributed immediately, the company will set their value and estimated taxes based on the share price after the lock-up period ends. If it’s below $38, the $4.6 billion liability will go down. If it’s higher, “we may need additional financing,” the prospectus warned.

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2 Responses to Uncle Sam A Winner in Facebook IPO

  1. Spo101 on May 28, 2012 at 6:23 pm

    Insider trading is what comes to mind when I think of the Facebook stock offering. Once again the SEC missed the boat and the banks sank the boat with all the “little people” aboard. After the corporate crime wave that was perpetrated during the Bush/Cheney disaster… I can’t believe there is still morons/fools out there who think capitalism can survive WITHOUT ethics, responsibility and accountability.

    Believe it or not, Republicans all over the nation are involved with a reverse Robin Hood philosophy of raising taxes on the poor to pay for tax cuts for the rich… INSANITY!

    If the government doesn’t start to regulate and punish the con artists on Wall St then the PEOPLE will rise up to get the power back. Like I always tell my Conservative wacko friends, this ain’t no Tea Party, this is a full scale Class War and the Aristocrats are kicking the American People’s @$$! If you don’t join the fight then you’re a coward who doesn’t deserve the rights and freedoms the Constitution affords.

    None too soon, because the hypocrites are thick as thieves. Open your eyes and look at the Bush/Cheney catastrophe… The rich guys spit in American faces, pulled down Americans pants, f***ed Americans in the @$$ for 8 years and stole your wallet before they left in 2008. Any American citizen with half a brain is VERY angry, demanding accountability but Republicans don’t see it that way. They liked the violations so much they want MORE!

    I think we need to focus on those in the TOP 1% Koch Bros, George W. Bush, Mitt Romney types, who made their fortunes on the backs of American workers… with American ingenuity, technology, ideas… using infrastructure paid for by the American taxpayer… And how did they repay us? The silver spoon, trust fund baby m’f***er’s moved all our jobs to Asia, fouled our environment with stuff that would make a bill goat puke and turned our politicians into a stable of high priced prostitutes.

    It used to be called bribery, collusion and all those crimes covered by the RICO Act. How come they can get away with a white bred corporate crime wave of epic proportions but our jails are filled by pot smokers? WHY IS THAT? These Wall Street guys ruined our economy with their reckless policies and deregulation, so why aren’t the American PEOPLE standing up to them? WHY AREN’T THE FED’S PROSECUTING?

    There’s only a few thousands of them but there’s MILLIONS of us. There’s 48 MILLION of us living below the poverty level. Probably another million+ non-violent offenders ruined by the jail/prison industrial/vendor complex & Convict Lease System. That’s a fight I’ll take… what about YOU? I am somebody who despises cowards, cyberbitchslap2.blogspot.com

  2. David Shapiro on May 29, 2012 at 9:06 am

    While I appreciate the passion of the previous commenter, I do also see our situation as one in which the wealthiest Americans serve up what the majority seem to want, in many ways.

    Consider Walmart. Through its personnel practices, its meager salary scale, and its practice of purchasing merchandise from the most labor-hostile foreign misers, it hurts the least-monied Americans. Who buys at Walmart, voting in favor of its practices by their payments? The poorest Americans. Walmart flourishes.

    Consider, for contrast, No-Sweat apparel. This company sold casual clothing that it promised was union made under decent working conditions. It didn’t seek extraordinary profits, but still its well-made clothing cost more than sweatshop products made, for example, in China No Sweat folded; too few of us were willing to buy from them.

    Don’t like the way Facebook is run? Don’t psst there. Somehow, I suspect that even those who are angry at Zuckerman are unlikely to heed this suggestion.

    Our money talks; whether or not we like what we’re saying with it, it’s we who are doing so, and far more loudly than any member of the ignoble one percent can speak.

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