Goldman Values Facebook at $50 billion, Digital Sky Technologies Makes 400% on its Investment Since 2009!

The New York Times announced today that Goldman Sachs and Russian Investor Digital Sky Technologies are investing $500 million into Facebook at a valuation of $50 billion. According to Second Market, some private investors have bid up the Company's shares to imply a value of $56 billion. This bid comes soon after Google announced a $6 billion bid for Groupon a couple weeks ago. Some call the Facebook valuation astronomical, and it theoretically doubles the net worth of founder Mark Zuckerberg to approximately $14 billion. Two years ago Microsoft attempted to purchase a stake in Facebook at $15 billion, which at the time was deemed too high. Digital Technology's original 2009 stake in Google, which valued the company at $10 billion has since quintupled. While Goldman is purchasing shares, VC firm Accel Partners is selling very aggressively at much lower valuations. When examined more closely, with this purchase, Goldman may have bought it's right to the Facebook IPO. If Goldman is able to IPO shares of the company at a higher price, it could eventually simply divest of its shares in the open markets at a higher valuation and make a fat fee in the process.

According to Reuters, "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.

According to Dealbook, "the deal could double the personal fortune of Mark Zuckerberg, Facebook's co-founder.
Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. The deal makes Facebook now worth more than companies like eBay, Yahoo, and Time Warner.

The stake by Goldman Sachs, considered one of Wall Street's savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google. The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions -- all without being a publicly traded company. The investment may also allow earlier shareholders, including Facebook employees, to cash out at least some of their stakes.

The new investment comes as the SEC has begin an inquiry into the increasingly hot private market for shares in Internet companies, including Facebook, Twitter, the gaming site Zynga and LinkedIn, an online professional networking site. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.

The new money could add pressure on Facebook to go public even as its executives have resisted. The popularity of shares of Microsoft and Google in the private market ultimately pressured them to pursue initial public offerings.

So far, Facebook's chief executive, Mark Zuckerberg, has brushed aside the possibility of an initial public offering or a sale of the company. At an industry conference in November, he said on the topic, "Don't hold your breath." However, people involved in the fund-raising effort suggest that Facebook's board has indicated an intention to consider a public offering in 2012.

There has been an explosion in user interest in social media sites. The social buying site Groupon, which recently rejected a $6 billion takeover bid from Google, is in the process of raising as much as $950 million from major institutional investors, at a valuation near $5 billion, according to people briefed on the matter who were not authorized to speak publicly.

"When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public," said Chris Sacca, an angel investor in Silicon Valley who is a former Google employee and an investor in Twitter. "This time, the Street is smartening up. They realize there are true growth businesses out here. Facebook has become a real business, and investors are coming out here and saying, 'We want a piece of it.'"

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Under the terms of the deal, Goldman has invested $450 million, and Digital Sky Technologies, a Russian investment firm that has already sunk about half a billion dollars into Facebook, invested $50 million, people involved in the talks said.

Goldman has the right to sell part of its stake, up to $75 million, to the Russian firm, these people said. For Digital Sky Technologies, the deal means its original investment in Facebook, at a valuation of $10 billion, has gone up fivefold.

Representatives for Facebook, Goldman and Digital Sky Technologies all declined to comment.

Goldman's involvement means it may be in a strong position to take Facebook public when it decides to do so in what is likely to be a lucrative and prominent deal.

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

In a rare move, Goldman is planning to create a "special purpose vehicle" to allow its high-net worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman's proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the S.E.C. will look favorably upon the arrangement.

Already, a thriving secondary market exists for shares of Facebook and other private Internet companies. In November, $40 million worth of Facebook shares changed hands in an auction on a private exchange called SecondMarket. According to SharesPost, Facebook's value has roughly tripled over the last year, to $42.4 billion. Some investors appear to have bought Facebook shares at a price that implies a valuation of $56 billion. But the credibility of one of Wall Street's largest names, Goldman, may help justify the company's worth.

Facebook also surpassed Google as the most visited Web site in 2010, according to the Internet tracking firm Experian Hitwise.

Facebook received 8.9 percent of all Web visits in the United States between January and November 2010. Google's main site was second with 7.2 percent, followed by Yahoo Mail service, Yahoo's Web portal and YouTube, part of Google.

For Mr. Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.

Even as Goldman takes a stake in Facebook, its employees may struggle to view what they invested in. Like those at most major Wall Street firms, Goldman's computers automatically block access to social networking sites, including Facebook."

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Comments (25)

Jan 3, 2011

We should have all dropped out of college and started online services to rate the appearance of women...

Jan 3, 2011

I this is absolutely ridiculous, or not? The multiple also seems to have fallen...Did Facebook really earn $2 billion this year? That implies a 25x P/E multiple, which is not too far-fetched...

Jan 3, 2011

Isn't 5x return equivalent to 400%?

Jan 3, 2011

wait that was $2 billion in revenue...so 25x revenue...I stand corrected. This is somewhat ridiculous.

Jan 3, 2011

The reason this effin website generates so many hits is because the people creeping on each other are nobodies... if they were all busy like us they wouldn't time to get on Facebook and douche around for hours... Then again, wall street wouldnt be wall street if everybody was like us.

fuck it, this is getting out of control. We should start a social media poll, to determine which would be the first bubble to burst. Facebook vs Twitter vs LinkedIn vs Other

.

Jan 3, 2011

5 Reasons to Block Facebook and Twitter at Your Office:

http://venturebeat.com/2010/11/01/5-reasons-to-blo...
Pretty funny, especially the one about HR. That's how the whole Jeffrey Chiang thing got started.

Jan 3, 2011

This is the most ambitious pump-n-dump in history

Jan 3, 2011
Midas Mulligan Magoo:

This is the most ambitious pump-n-dump in history

Yes, seems that way (the SPV for PWM clients...), but also seems like a bit of an investment so as to ensure their TMT takes FB public...

Jan 3, 2011

what Midas said.

Jan 3, 2011

You know what would be a useful financial innovation? A way to short sell the stock of private companies. Someone get on that.

Jan 3, 2011
celestus:

You know what would be a useful financial innovation? A way to short sell the stock of private companies. Someone get on that.

If someone wanted to double down, but no one wanted to sell them shares, then I guess they could create a synthetic instrument whereby someone shorts their shares (so they profit twice if the stock goes up, lose twice as much if it goes down).

There might be covenants in the articles or regulations that prevent this.

I think it's funny that GS is going to put clients into the stock, what a waste; if they recommended that to me I would fire them as my private banker. No way this valuation makes sense. Facebook has a huge network externality but serious monetization issues and its popularity (at least anecdotally, as far as I can tell) is waning. Like any fad/bubble it will come back down to a reasonable level.

Jan 3, 2011

Good luck finding comps that work on something like Facebook -- doesn't Zuckerberg's site have the potential to revolutionise the way we use the internet? The Person of the Year edition of Time Magazine described nicely how it may change how business finds customers by references through peers etc. Perhaps I am too optimistic but couldn't Facebook really be the next big thing? How would you have valued a firm with a de facto global monopoly position in railroads, air travel, telecoms, etc when these things came to market?

Jan 3, 2011

i would guess that this sale is to raise cash and not so much for current owners to cash out. the company might have 2b revenues, but it doesn't have nearly that much in EBITDA and they spend a ton of capex. probably want cash to fund continued high growth and to keep up with the current tech sector acquisition spree.

like others said, probably also about GS bringing in other investors (through SPV and/or future IPO) to get fees and tech banking cachet

Jan 4, 2011

BINGO!!!!!!

bankbank:

i would guess that this sale is to raise cash and not so much for current owners to cash out. the company might have 2b revenues, but it doesn't have nearly that much in EBITDA and they spend a ton of capex. probably want cash to fund continued high growth and to keep up with the current tech sector acquisition spree.

like others said, probably also about GS bringing in other investors (through SPV and/or future IPO) to get fees and tech banking cachet

Jan 3, 2011

facebook is easily the next bubble (50B value now and will continuously grow) I just dont see how they will be able to create such innovations to assign credibility to their growing valuation.

Jan 3, 2011

I love how GS is trying to skirt the public disclosure rules by creating a blind pool of investors. They'll do anything so that FB doesn't have to post the real numbers before GS gets paid.

Jan 3, 2011

Right now, there are people on Sharespost offering to buy Facebook stock at a $100 billion valuation.

Jan 3, 2011

You know it's a bad investment if Goldman Sachs is recommending it to its clients.

Jan 3, 2011

Def a move to be the lead underwriter on the FB IPO... GS being crafty once again...

Jan 3, 2011

"You wanna know what's cooler than a Billion Dollars?

50 Billion Dollars."

Jan 4, 2011

Ridiculous! I really don't see a viable revenue generating stream for FB. And as mentioned above, the only reason they have the number of hits they do is from people creeping on other peoples' pages and checking out their pictures. Its another fad that will last another couple of years and fall off substantially. Once everyone gets tired of reading crap posted by a bunch of narcisstic morons who have no other way to brag about how awesome their life isn't ... Although, I thought reality TV wouldn't last either ... DWTS, American Idol, Survivor, and my personal favorite The Housewives series. When will society stop being a bunch of idiots and start giving a shit about topics that actually determine the destiny of our generations? Until people wake up and stop living life through who they see on TV or on FB, will companies like FB stop receiving the attention it has from investors and society alike. In the meantime, ride out the fad while its still hot!

Jan 6, 2011

Facebubble

Jan 6, 2011

My most significant contribution to this post, in reference to The Social Network:

"The GS Facebook Pump and Dump"

"How about Pump and Dump GS with Facebook.... its cleaner."

.

Jan 6, 2011
Comment
Jan 11, 2011