Facebook IPO Expected to Boost Silicon Valley Economy

PHOTO: Mark ZuckerbergPlayDavid Paul Morris/Bloomberg via Getty Images
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The Facebook IPO is expected to be a boon not just to the technology sector but to local business owners who've said they are smarter and better prepared to avoid the disaster of the previous dotcom bubble.

Leonard Mezhvinsky, a developer in Millbrae, Calif., has spent the past three years building a property in Hillsborough, 30 minutes north of Facebook's headquarters in Menlo Park. He expects the $13 million, six-bedroom house to be completed in August or September, just in time for a Facebook employee newly rich from the initial public offering to spend some money.

"It's very simple," Mezhvinsky said when asked how Facebook's IPO would affect local real estate. "The Facebook IPO will create in an instant multiple millionaires who when they sell their stock to cash out will be looking for higher-end properties in and outside San Francisco."

Facebook's $5 billion initial public offering stands to be the largest Internet IPO of all time, passing the Dutch company World Online's $2.8 billion issue in 2000, according to Thomson Reuters Deals Insight.

In addition to benefiting employees of Morgan Stanley, which is managing Facebook's offering, Goldman Sachs, Bank of America Merrill Lynch, Barclays Capital and JPMorgan, chosen as bookrunners, would receive some financial reward.

There have been 31 new, global IPO issues so far this year totalling $1.9 billion, and Facebook's prospective IPO would potentially account for 72 percent of activity in 2012, according to Thomson Reuters.

In the San Francisco area, Mezhvinsky, a principal at Sieger Property Development, said he had seen an increase in activity in the local real estate market. He said the growing interest in real estate may be because of multi-millionaires cashing out stock, or anticipating cash, after initial public offerings from such nearby companies as gamemaker Zynga in December and social media site LinkedIn last May.

Early employees, or those with higher tenure, such as founder and CEO Mark Zuckerberg, who owns 28 percent of Facebook's shares, and many of his Harvard peers, along with the executive team, are most likely to have the most shares among the company's more than 3,000 employees.

Mezhvinsky expects the wealth created from Facebook's IPO to dwarf that of Zynga and LinkedIn combined, although it will not be instantaneous, as employees with stock options will have to wait months to cash in their stock, and the newly wealthy usually take some time to adjust to their newfound wealth, he said.

"They still live in apartments and small houses and suddenly they have $20 million of IPO stock," said Mezhvinsky.

There are also rumors of speculators snatching up property near Facebook's headquarters, in the hope of flipping properties to newly rich employees. But Mezhvinsky said developers were much more cautious now than they were before the dotcom bubble more than a decade ago.

"The developers who weren't cautious are probably bankrupt now. Those who were semi-cautious are now fully cautious," he said. "But as the economy improves in three or four years that cautiousness will go away as it always does."

Mezhvinsky, who began working in Silicon Valley in 2007, said developers who previously built three or four houses before the real estate bubble may be building one or two these days.

"Everyone has scaled down in their risk taking," he said.

Ron Gong, a managing director at financial management and wealth advisory firm Harris myCFO in Palo Alto, said wealth attracts service providers no matter if it's Silicon Valley or elsewhere. But the way people spend money and invest differs when compared with the dotcom era.

"Business models have been tested, and there is more experience," he said. "So more realistic assumptions and a return to business fundamentals are being used."

Gong, who has worked in the wealth management business in the area for 23 years, said much of the recent wealth creation in Silicon Valley had been driven by social media and related technologies.

Harris myCFO, which stands for "comprehensive family office," also has entrepreneurial roots in Silicon Valley. Gong said his firm was accustomed to working with the ultra-affluent who have at least $25 million in investable assets, and those who may not yet be in that wealth class but could be.

"Those are the people we want to work with closely and invest in them," he said.

Gong said he could not disclose whether his clients worked for the Silicon Valley social media companies.

But, he said, "We know all these companies very well, and being in the heart of Silicon Valley we are well-versed in wealth management issues that come about daily."