Is Facebook California's Savior?
Facebook's IPO, by some estimates, will turn a thousand of its employees into instant millionaires. So many suddenly wealthy taxpayers in California couldn't come at a better time.
It's unlikely most of the newly minted rich will follow Eduardo Saverin to Singapore, and their income and capital gains taxes could help the Golden State close a budget deficit that is again growing.
Are Facebook's fortunes enough to save California?
"Who knows? That's Wall Street," said Gov. Jerry Brown this week as he unveiled plans to close a $16 billion budget gap over the next 13 months. "I hope Facebook brings in a lot of money...[but] I'd be a little cautious."
The Governor's revised budget predicts Facebook's public offering could create an additional $14 billion in income for Californians this year. The state's Department of Finance and Legislative Analyst's Office say this the IPO alone will account for 20 percent of income growth. Taxes over the next few years related to the IPO could reach $2.9 billion if an income tax hike is approved in November, $2.4 billion if it's not.
It's not just new income taxes California is hoping for. Realtors, wealth managers, contractors, and other service providers in Silicon Valley are hoping to profit from Facebook employees finally enjoying the fruits of their labor. "We're definitely expecting some new business," says car dealer Mark Putnam of Putnam Lexus in Redwood City. His customers include Facebook employees. "Some of the Zuckerbergs are customers of ours...his parents were in, and his sister bought a car."
Still, Putnam is not expecting a repeat of the mad scramble for new cars he saw during the dotcom bubble. "Things were crazy (then). They couldn't make cars fast enough for this area."
Other locals are also trying to keep expectations low. "What I've found about Facebook is there's a culture with that group that's unlike any I've ever seen," says veteran realtor Miles McCormick. "They're very attuned with 'less is more'." He says the LinkedIn IPO last year didn't move the real estate market as much as expected, and Facebook employees may be even more low key. After all, CEO Mark Zuckerberg drives an Acura and lives in a modest Palo Alto home, even if "modest" in this neighborhood is a few million dollars.
McCormick says Palo Alto home prices have continued to rise during the downturn, but lending has changed. During the go-go days of the dotcom bubble, buyers used stock options as collateral for home loans. "In our current mortgage environment, I can't see any lender doing that, and those (stock option) funds will not be available immediately," since there's a six-month lockup on insiders selling shares after the IPO.
The lockup will expire in mid-November, and that's when the state is hoping insiders will begin cashing out. "It's highly speculative," says California Controller John Chiang. "It obviously depends on when people exercise their options, when they sell their stock, and how does Facebook do?"
After the IPO, car dealer Mark Putnam doesn't think most of his new business will come from Facebook employees directly. "What we'll see more, in effect, is the employee will buy a house, they'll want it remodeled. So the realtor, the contractor, everyone else gets money," he says. "The ripple effect that will last probably for more than a year will get more business than just Facebook."
This assumes Facebook performs well, and it assumes Facebook employees will spend.
Miles McCormick is confident of the former, not so much of the latter. He calls the Facebook employees he knows "The Club of Unpretentious Pretentiousness — 'Do I buy something grand? No. Am I kind to Mother Earth? Yes.'" McCormick warns not to expect a big post-IPO spending spree "I don't think it's going to be nearly as dramatic as in previous, major IPOs, and certainly nothing like what we lovingly refer to as 'The Dot-Bomb Era'."
-By CNBC's Jane Wells