Facebook's $50 Billion Goldman Goldmine

David Kirkpatrick The Daily Beast January 5, 2011

by David Kirkpatrick Info

David Kirkpatrick writes about technology for the Daily Beast. A former Fortune reporter, he is the author of The Facebook Effect: The Inside Story of the Company that is Connecting the World.

Far from turning up the heat for Facebook to go public, Goldman Sachs’ $450 million investment, along with Digital Sky’s $50 million more, may actually delay the social-networking giant’s IPO, says David Kirkpatrick.

Monday’s eye-popping announcement that Goldman Sachs was investing $450 million in Facebook, now with a $50 billion valuation, has reinvigorated the attention of a Facebook-obsessed world.

I think the deal is being widely misinterpreted. The article that broke the news in The New York Times suggests that the deal may increase pressure on Facebook for an IPO. Its impact could in fact be quite the opposite. That would well suit CEO Mark Zuckerberg.

Why do companies go public? Generally for two reasons: to raise capital to expand operations and to offer liquidity to hardworking employees who have been compensated in part with stock options. Yet both of those goals will be achieved for the time being, with the deal Goldman has arranged for Facebook. Not only is Goldman investing, but Russia’s Digital Sky Technology is also putting in an additional $50 million, on top of the roughly $700 million it has already invested over the past two years, for about 9 percent of Facebook.

In addition, the Times reports that Goldman is arranging for its clients to purchase as much as an additional $1.5 billion in Facebook stock over time. This will be through an investment vehicle that enables sophisticated investors to buy units rather than shares. (They will be required to invest a minimum of $2 million, according to an update in the Times DealBook article.) Some of those sales are likely going to come from employees, who will thus get liquidity.

Facebook is restricted by SEC regulations from having more than 499 shareholders; otherwise, it must begin publishing its financial data as if it were public. At that point most companies just decide to do an IPO. But new investment vehicles like the one Goldman is creating enable Facebook technically to add only one shareholder, though many individuals gain indirect ownership. Recently the SEC has announced it is investigating trading in shares of Facebook and other private technology companies, including LinkedIn, Zynga, Groupon, and Twitter. There appear to be many reasons for the SEC’s concern, but it is sure to take a close look at these new multi-investor vehicles that are treated as a single shareholder.

Goldman has good lawyers, and its funds could very likely withstand this legal test. If it does, it could help Facebook delay its IPO.

Zuckerberg views taking the company public about the same way most of us view getting a root canal: It might sometime be necessary but should be avoided or delayed as long as possible.

Pictured L-R: Goldman Sachs chairman and CEO Lloyd Blankfein; Facebook CEO Mark Zuckerberg. (Photos by AP Photo)

With the Goldman and DST money, along with the additional funds being raised by Goldman, Facebook will gain up to $2 billion in additional capital for expansion, hiring, acquisition, or whatever other strategic challenges emerge as the once-upstart increasingly goes toe-to-toe with the biggest Internet and tech companies, like Google and Apple.

In my many conversations with Zuckerberg and his colleagues while reporting my book The Facebook Effect: The Inside Story of the Company That Is Connecting the World, it has been clear that he views taking the company public about the same way most of us view getting a root canal: It might sometime be necessary but should be avoided or delayed as long as possible.

12 January 3, 2011 | 11:05pm Twitter Email Share var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); if(OutbrainPermaLink.search(/blogs-and-stories/)>=0){ OutbrainPermaLink += "full/"; } var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Technology, Business, Goldman Facebook, Internet Companies, Facebook Valuation, Facebook Ipo, Digital Sky Technologies, Mark Zuckerberg, Social Networking, Facebook, Media, Goldman Sachs (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: Southpaw

Another tech bubble looming?

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 7:41 am, Jan 4, 2011 flyoverland

I have to admit, I don't have a facebook page. I understand it is very popular, but I still don't understand the business model very well. Having run a public company and one that experienced an expectations bubble prior to the actual reality of the market, I can tell you to be very careful of buying things prior to understanding that reality. Yes, but Goldman just bought...yes, I understand, but what Goldman just probably bought is the rights to manage the books in the IPO. Goldman are very smart guys, I use them too, but they can be gone in an instant with a big profit. If Facebook is just another advertising vehicle, then you have to wonder where the industry will find enough new ads to support this valuation. Either that, or the value of other existing media companies is going to have to decline because the pool of ad dollars isn't going to increase just to support Facebook. I suspect the reason FB hasn't gone public yet is that they are still struggling to figure out how to best tweak the model to justify the lofty expectations. As the article points out, once you go public you have to lift the kimono.

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Facebook's $50 Billion Goldman Goldmine

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