Issue of the week: Facebook’s private offering

It feels like “a profoundly unfriendly move for a company with 500 million friends,” said Roben Farzad in Bloomberg Businessweek. In a blatant example of “insider capitalism,” Face­book, the social-networking giant launched seven years ago in a Harvard dorm room, last week agreed to sell a $450 million stake in itself to investment bank Goldman Sachs, and a $50 million stake to Russian investment group Digital Sky Technologies, in a transaction that values the entire company at $50 billion. In addition, Goldman agreed to place $1.5 billion of shares with some of its most favored clients. Goldman wants to structure the deal to enable Face­book “to remain below the 500-investor threshold that would force it to make an array of Securities and Exchange Commission disclosures. A special Goldman fund with numerous client investors, the legal thinking goes, could be counted as a single investor.” But whether or not the SEC approves that plan, an initial public offering is likely next year. With demand among Goldman clients likely to be high, few of Facebook’s users will have a chance to buy in.

It’s a great deal for Goldman, though, said Gregory Zuckerman and Liz Rappaport in The Wall Street Journal. The firm’s clients will pay a 4 percent fee to purchase Facebook shares, plus 5 percent of any gains. Goldman also has the inside track to manage Facebook’s IPO, which is likely to generate a fee of $100 million or more for the firm. “More revenue could come from managing assets of Facebook executives.” Investors, for their part, will be buying into a profitable enterprise, said Jason Zweig, also in the Journal. Documents circulated to potential investors show that the company is “closing in on $500 million in annual profit” on revenue of about $2 billion. But can Facebook grow fast enough to justify a valuation of 25 times current revenue? One experienced mutual-fund manager says Facebook would have to grow “at least as successfully as any company in history” to generate even a market return for investors. That’s a tall order.

Facebook insiders seem to think so, said Duff McDonald in Fortune.com. It’s likely that the new investors will be buying shares from the company’s ground-floor investors—including venture capital firm Accel Partners and early backer Peter Thiel, and possibly founder and CEO Mark Zuckerberg. What would prompt these well-informed insiders to sell unless they suspected that “the era of stupendous growth was over”? Remember, though, that when Microsoft bought a piece of Facebook in 2007 at a price that valued the whole company at $15 billion, critics derided that valuation as “astronomical,” said Felix Salmon in Reuters.com. A company whose valuation has more than tripled in three-plus years might not be such a foolish bet after all.

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