The social media network, which boosted its borrowing capacity by two-thirds just six months ago, is trying to get more financing for its phenomenal growth.
“All these tax obligations are being created and you need cash to take care of it. You see this all the time but in this case it will be substantial,” said Michael Moe of GSV Capital, which owns Facebook shares.
“Having the cash to be able to take care of that makes a lot of sense. That would be the motivator of a larger credit facility.”
The social network revealed its plans to pay taxes on its employees’ restricted stock units (RSUs) when they vest six months after the company’s initial public offering. The exact amount is likely to total billions of dollars, based on Facebook’s stock price at the time, writes Reuters.
Helping employees cover tax on RSUs leaves the employer with a “very expensive obligation” that could increase if Facebook shares climb, said Bart Greenberg, a partner at law firm Haynes and Boone LLP who advises start-up tech companies.
“It could create such a large cash obligation that it eats up most of the credit facility,” Greenberg explained. “That facility may have been originally set aside for acquisition opportunities or working capital.”
The company said it may sell equity securities, tap its credit facility, use cash some other options and combinations to meet its tax obligation, according to its IPO filing.
In Feb. 2011, Facebook set up a $1.5 billion credit agreement with affiliates of Morgan Stanley, J.P. Morgan, Goldman Sachs, Bank of America’s Merrill Lynch and Barclays Capital, the leading underwriters of the company’s IPO. In September 2011, Facebook upped that number to $2.5 billion.
“The golden rule of finance is that you get the money when you can, not when you need it,” said Moe, who co-founded investment bank ThinkEquity.
“Creating maximum flexibility will allow you to be efficient with your use of capital but also opportunistic when appropriate.”
A line of tech companies which recently went public have also arranged similar credit facilities. For example, Zynga, the social games giant, set up a $1 billion facility with some underwriters of its IPO, which happened late last year.
“Facebook and Zynga generate substantial profits, but the companies have big credit facilities because it is good corporate finance strategy to line up back-up cash from a position of strength, Moe and others said,” reports Reuters.
By the way, Zynga announced today that it is expanding beyond the walled garden of Facebook to offer games at Zynga.com, writes Game Informer.
“On Zynga.com, players can meet and connect with others who share a love for social games and help players progress faster in their games by tapping the entire community to instantly get what they need to complete quests, obtain virtual items, and advance to the next level,” explains the company on its blog.
Zynga CEO Mark Pincus said this is not a move to separate from Facebook, but rather to compliment the social network.
“We’re proud to be a part of Facebook’s ecosystem and we built Zynga.com to complement their pervasive social graph,” he said. “Zynga.com will be one of the first sites completely integrated with Facebook which has become the world’s social dial-tone.”