GS Invests in Facebook at $50B Valuation

http://dealbook.nytimes.com/2011/01/02/goldman-invests-in-facebook-at-50-billion-valuation/ “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.”

I’d be interested in how they came up with the $50B figure.

Well, they *probably* know what they’re doing…

bchadwick Wrote: ------------------------------------------------------- > I’d be interested in how they came up with the > $50B figure. Supply/demand dynamics, that’s what shares are going for in secondary market auctions.

bchadwick Wrote: ------------------------------------------------------- > I’d be interested in how they came up with the > $50B figure. Good point. Wasn’t GS already a shareholder? So they were essentially negotiating with themselves, not exactly an arm’s length deal. Assuming FB has been through several rounds of financing, acquiring the most senior class of stock at $x per share doesn’t mean all shares have that same value.

I haven’t seen anything in any of the articles I’ve read that said what class of shares we’re talking about here. You can’t just take the price paid for preferred shares, divide by the as-converted percentage ownership, and say that’s the implied value of the company.

higgmond Wrote: ------------------------------------------------------- > I haven’t seen anything in any of the articles > I’ve read that said what class of shares we’re > talking about here. You can’t just take the price > paid for preferred shares, divide by the > as-converted percentage ownership, and say that’s > the implied value of the company. Proper analysis does not sell newspapers.

higgmond Wrote: ------------------------------------------------------- > I haven’t seen anything in any of the articles > I’ve read that said what class of shares we’re > talking about here. You can’t just take the price > paid for preferred shares, divide by the > as-converted percentage ownership, and say that’s > the implied value of the company. uhm, yes you can, considering that this is what the guys who spend their money in the deal do.

Mobius Striptease Wrote: ------------------------------------------------------- > higgmond Wrote: > -------------------------------------------------- > ----- > > I haven’t seen anything in any of the articles > > I’ve read that said what class of shares we’re > > talking about here. You can’t just take the > price > > paid for preferred shares, divide by the > > as-converted percentage ownership, and say > that’s > > the implied value of the company. > > > uhm, yes you can, considering that this is what > the guys who spend their money in the deal do. Really? Ask them to give up their liquidation preference, cummulative dividend, and board seats then.

why would i ask them this? of course senior preferred share is worth more than a stock option. i dont care about this unless im an auditor it’s somewhat paradoxical how you can claim to rely on an arm’s length deal for your valuation estimate, but at the same time reverse-engineer the thought process of the deal on your own terms.

Mobius Striptease Wrote: ------------------------------------------------------- > why would i ask them this? of course senior > preferred share is worth more than a stock option. > i dont care about this unless im an auditor > > it’s somewhat paradoxical how you can claim to > rely on an arm’s length deal for your valuation > estimate, but at the same time reverse-engineer > the thought process of the deal on your own terms. I’m not reverse engineering anything. There is not a credible VC or PE investor in the world who believes the value of the company he just invested in is equal to his investment divided by the as-converted percentage ownership. He’ll certainly let management of the portfolio company think he believes that because it makes them feel good, but knows the company is really worth a fraction of that.

Reading this, I am struck by how little I really understand about private equity.

higgmond Wrote: ------------------------------------------------------- > I’m not reverse engineering anything. There is > not a credible VC or PE investor in the world who > believes the value of the company he just invested > in is equal to his investment divided by the > as-converted percentage ownership. He’ll > certainly let management of the portfolio company > think he believes that because it makes them feel > good, but knows the company is really worth a > fraction of that. agreed. people forget this is the last ‘credible’ social network as myspace was trashed. its also global and the younger generation is perpetual. its essentially priceless from a marketing perspective. everyone knows the best audience is the captive one; its why i have to pay $8 for a beer at the stadium.

higgmond Wrote: He’ll > certainly let management of the portfolio company > think he believes that because it makes them feel > good, but knows the company is really worth a > fraction of that. Bingo. Cumulative convertible preferred stock isn’t really stock, it’s debt with an equity warrant. If facebook were sold to Google tomorrow for $20B, GS would still make out fine on this deal. Furthermore, they’ll likely be able to sell down a decent amount of this risk to their clients, and their first in line for a FB IPO - paying $500M for the right to lead that IPO is alone a good trade.

higgmond Wrote: ------------------------------------------------------- > > I’m not reverse engineering anything. There is > not a credible VC or PE investor in the world who > believes the value of the company he just invested > in is equal to his investment divided by the > as-converted percentage ownership. He’ll > certainly let management of the portfolio company > think he believes that because it makes them feel > good, but knows the company is really worth a > fraction of that. and how did they determine the value in practice then - they did an OPM? i think not the VC and management agreed on a pre-money valuation of the business, but the VC has to put more cash than the implied value of his percentage equity investment because its a senior round and they’ll be getting higher liquidation preference? who is in position of negotiating power here, the guy with the check obviously!

And let’s not forget the “perks” Goldman gets. From DealBook: “The ancillary benefits of buying a stake in Facebook are several. First, it has likely established itself as the leading candidate to win the very lucrative and prestigious assignment of Facebook’s initial public offering, whenever that day comes. Then, of course, there are secondary share offerings, mergers-and-acquisitions business and other banking fees that would inure to Goldman. Second, Goldman’s private wealth management clients — handled by the firm’s money management unit for rich families — can boast to their friends on the golf course that they own a pre-I.P.O. stake in Facebook. There is also the huge paper wealth being accumulated by the Facebook co-founder, Mark Zuckerberg, and his fellow executives that will some day be monetized and have to be managed. Goldman would likely have a leg up there, too.”

“perks” is an accurate term, paying cash for “perks” is a waste of money and the VC’s know better than that. of course they are in a position to negotiate themselves perks and deal sweeteners

I thought that Pre+Inv=Dollar dollar Bills Ya’ll.

Am I the only one that thinks this is too cheap? If GOOG’s worth $200B, surely Facebook is worth a quarter of that. FB also has a better shot of breaking into China.

I think GS has the right idea here. Charge high fees as a broker for clients who want to be first in line for a highly sought IPO. Then, make money regardless of how the shares perform.