Facebook has a potentially taxing problem on its hands, and the company will address it by increasing its $2.5 billion credit line.
Reuters reported that Facebook is facing a major tax hit following its upcoming initial public offering, due to employee stock awards that will vest.
The company has said in the past that it intends to pay taxes on the restricted stock units of its employees, and that tab will likely be billions of dollars.
Bart Greenberg, a partner at law firm Haynes and Boone, called the plan a “very expensive obligation” that could become more expensive if Facebook’s stock price rises. He told Reuters:
It could create such a large cash obligation that it eats up most of the credit facility. That facility may have been originally set aside for acquisition opportunities or working capital.
And Michael Moe of GSV Capital, which owns shares in Facebook, told Reuters:
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. 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 golden rule of finance is that you get the money when you can, not when you need it. Creating maximum flexibility will allow you to be efficient with your use of capital, but also opportunistic when appropriate.
According to Reuters, Facebook set up a $1.5 billion credit agreement in February 2011 with affiliates of Morgan Stanley, J.P. Morgan, Goldman Sachs, Merrill Lynch, and Barclays Capital, and the company hiked the total to $2.5 billion in September.