Goldman’s Facebook coup

By Felix Salmon
January 3, 2011
reports that Goldman Sachs is investing $450 million of its own money into Facebook.

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The NYT reports that Goldman Sachs is investing $450 million of its own money into Facebook and that it’s bringing along $50 million from Digital Sky Technologies and as much as $1 billion more from its high-net-worth clients — all at a valuation of $50 billion.

The enormous sums of money involved here clearly ratify the valuation: this isn’t a handful of shares trading in an illiquid market, it’s an investment substantially larger than most IPOs.

It’s worth remembering here that only two years ago, when Microsoft bought into Facebook at a $15 billion valuation, that sum was described in the NYT as “astronomical”. But that said, Facebook’s multiples have clearly shrunk from those heady days: in 2007, Facebook could actually use Microsoft’s $240 million to fuel its expansion. Today, it’s reportedly earning $2 billion a year, which implies to me that this is a cash-out rather than a dilutive offering. Facebook has raised, in total, about $850 million to date, and there’s no obvious need for a massive new round of funding which would dwarf that entire sum.

If Goldman is leading the buyers, then, who are the sellers? VC shop Accel Partners has been selling Facebook shares quite aggressively of late, at lower valuations than this. They could easily provide all the shares that Goldman is buying and still be left with a stake worth some $3.5 billion. And it’s entirely conceivable that some early employees might well want to diversify their holdings and have maybe a little less than 99% of their net worth in Facebook stock.

As for Goldman, it has probably bought itself the IPO mandate, which could easily generate hundreds of millions of dollars in fee income. It has also become the only investment bank which can give its rich-people clients a coveted pre-IPO stake in Facebook: the extra cachet that brings and the possible extra clients, make this investment a no-brainer. Facebook doesn’t need to stay worth $50 billion forever — Goldman just needs to engineer an IPO valuation somewhere north of that, then exit quietly in the public markets. And that is surely within its abilities.

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Comments
10 comments so far

Facebook is likely to go the way of MySpace, its predecessor. An extremely popular fad…until someone comes up with something better and everyone leaves.
But I’m a musician and I really like Facebook to find more fans for my Soft Music
Thank You! http://www.bridgetmusic.com

Posted by Sweetness2010 | Report as abusive

Goldman Sachs now is naming facebook.com best investment before it becomes an IPO, now who is on steriods facebook.com or Sachs. How can Goldman Sach predicta value, they have used bad judgment before. Who knows will facebook.com get so lucky or maybe facebook.com wants to go to China as well and show the chinese they can do it too. Just recently, facebook CEO is desperately looking ways to make more facebook money.

Posted by HearMeOut | Report as abusive

Interesting article. Very possible that it will go MySpace’s way, but as Sweetness2010 said, musicians are in desperate need of such sites.

http://www.reverbnation.com/#!/danzdma
http://www.facebook.com/pages/Danzdma/12 7509957294897?v=app_2405167945

Thank you :)

Posted by maxxm | Report as abusive

Facebook isn’t earning $2B a year, that’s their alleged revenue. They are barely breaking even, which is better than losing money, so their multiple is better because now they actually have one (that will fall like a stone once their actual numbers are revealed).

It’s not clear that Goldman is investing their own money, the NYT says they will be offering shares to their high end customers, who couldn’t otherwise buy them. I wouldn’t be surprised if they package all the shares this way, as they will have a hard time getting the government to back up this bet. I do wish they would offer 2 or 3 year puts, though.

Posted by OnTheTimes | Report as abusive

AOL 2.0

Posted by jporter | Report as abusive

Felix, you’re way too conventional to understand the genius of this. This is two evil empires quietly merging into one: Goldbook will own both our individual minds AND our governments. This will be a self-reinforcing mechanism: Facebook will provide an informational edge to Goldman’s trading ops while Goldman will make sure that these nosy regulators never get in the way of Facebook’s plans to harvest humanity’s every thought.

IPO fees? That’s so 20th century.

Posted by lemarin | Report as abusive

You answered your own question – GS doesn’t give a hud about Facebook, it just wants the fees and to impress it’s clients. I think if anything this is another assurance that Facebook creators are about the $$$ and not providing a service… the fact that ANY publication would name Zuckerberg man of the year ever is disgraceful. I also think that this move will turn off a lot of people from Facebook who were thinking of joining (or giving a solid boot in the ass to those that were soon to quit the site anyway).

Also want to back up OnTheTimes in that Facebook has only turned a profit once, and it was on the order of $50m – all these investments to date have been to keep the company operating. Perhaps this big investment means that Facebook is planning a big development in 2011.

Posted by CDN_finance | Report as abusive

I’m surprised to hear that even their revenue is $2 billion.
Back in 2009 the word on the street was they had $500 million in revenue and were going to grow to $800 million (
http://www.businessinsider.com/how-does- facebook-make-money-2010-5)

I’m curious if there ever was a $100 million plus firm trading at 50 times sales that realized that valuation in future growth. I’m sure Goldman is investing with lots more information than I have, but it just seems unlikely that their future profits could justify this valuation. Again, I see why Goldman would want this toehold for fees and prestige, just as I understood that Microsoft wanted their toehold to lock out Google. Still, eventually they will want to sell these shares to someone who wants them for the NPV of future dividends and I don’t see how that person would pay this valuation.

Posted by OneEyedMan | Report as abusive

Brilliant move by GS. Whether they profit or not from this deal, they are going to be telling existing (and prospective) clients that being a GS client means access to deals that are not available elsewhere.

Posted by Boyardee | Report as abusive

With the impending lawsuits where the chief of GS is facing charges of multiple counts of rape plus the launch of Google+ any major investments will be treaded on carefully, FB or not.

Posted by MichaelHost | Report as abusive
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