Explaining Southern California's economy

The 'Facebook Effect' that wasn't in California

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters. The social network's IPO didn't deliver the big capital gains taxes that California was counting on.

On Wednesday, KPCC's Julie Small caught up with the California state finance department and reported on the "Facebook Effect" that failed to live up to intial expectations. The state of California had anticipated a windfall from the sale of stock by employees of the gargantuan social network after its initial public offering.

We all know how the IPO went: it was a massive disappointment. Facebook opened at $38 a share and hasn't climbed back to that offering price since Day 1 of trading. Now it's bumping around in the high $20 range, but it fell below $18 earlier this year. 

California still collected a decent amount of tax revenue from Facebook employees and investors who sold stock. But the finance department had initially projected almost $2 billion; it got half that.

This is sad, but there's a far sadder factor at play, and it's called...the "Facebook Effect!"

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California's fading 'Facebook Effect'

Facebook Sets IPO Price At 38 Dollars A Share

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A poster is seen below a message board that is announcing Facebook's IPO price in Times Square on May 17 in New York City. The stock is now trading well below its $38 open.

I'm getting to this a bit later than planned, but that's okay, because Facebook's share price hasn't done much but go down, down, down for the past few weeks. Observers are even beginning to ask a once un-askable question: Should CEO Mark Zuckerberg be replaced?

Facebook has rallied a bit this morning, recovering from an all-time post-IPO low of $18.75. The company is currently in the throes of the slow-motion end of it's "lockup" period — through next year, early investors and Facebook employees will be able to sell shares in the firm. 

The state of California is facing a gigantic budget deficit and has been counting on revenue from the sale of those shares — which are taxed as capital gains — to ease some of the pain. Prior to the Facebook IPO, the Legislative Analyst's Office (LOA) said that California could anticipate a revenue windfall related to investors and employees cashing out. 

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Facebook Effect, we hardly knew ye!

Facebook Debuts As Public Company With Initial Public Offering On NASDAQ Exchange

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The share price of newly debuted Facebook stock is seen at the Nasdaq stock market moments after it went public on May 18, 2012. The company still hasn't seen the share price climb back to IPO levels.

Remember the so-called "Facebook Effect?" That was the tax windfall that California was expected to get as a result of the Facebook IPO creating a legion of overnight millionaires. It was identified back in January.

According the Mercury News, "Gov. Jerry Brown and state lawmakers in June approved a $91 billion budget that included $1.9 billion in expected tax revenue from Facebook employees striking it rich — a rare projection that helped stave off cuts to schools and programs for the sick, poor and disabled."

Now the LAO says that "a big chunk of the extra state revenue" — hundreds of millions — "resulting from the IPO won't materialize" if Facebook's share price doesn't reverse its current downward diving trend (it made a decent start today, ascending more than 8 percent in midday trading, but it's still way below its IPO opening price of $38).

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Will the 'Facebook effect' really help California's finances?

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The Facebook website is displayed on a laptop computer. Will the IPO cure California's sickly finances?

Now that Facebook has set a date for its IPO — May 18 — produced a "road show" video and priced its offering at somewhere between $28 and $35 a share, there's renewed discussion of how the $90-billion-ish debut of this California company will improve the state's troubled finances. Here's the L.A. Times:

California is hoping Facebook will have a “Google effect” on the state’s economy. Capital gains tax receipts from stock sales rose to $54 billion in 2005 from $39.7 billion in 2004, the year Google went public, according to Franchise Tax Board figures.

When Facebook executives and employees cash in shares, the state takes a 10% cut of the profits.

In February, Legislative Analyst Mac Taylor became the first state official to estimate what Facebook's big Wall Street debut could mean for California's ailing budget. He said the IPO could pump nearly $2.5 billion into state coffers over the next five years.

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The Facebook Effect and the problem of California's budget

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Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.

What exactly is the "Facebook Effect" and why could be both a boon and bane for California's budget crisis? According to the Legislative Analyst's Office, it's the massive amount of money that will be infused into California's sagging revenues when Facebook launches its anticipated IPO later this year.

Facebook isn't even going to sell that many shares to the public — it will probably continue a trend of "low float" IPOs in tech offerings, designed to elevate valuations (fewer shares equals higher demands equals higher prices). But it's still expected to raise $10 billion and achieve, overnight, a market valuation of $100 billion.

The capital gains from the creation of all those new Facebook millionaires will bring...well, billions to the state's coffers. As Bloomberg (via the San Francisco Chronicle) reports, Gov. Jerry Brown is estimating that 2012 will see $96 billion in total capital gains earned as income. The LAO figures rather less: $64 billion. 

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