Social Network Giant Facebook Sells Stock to Goldman Sachs

As an initial public stock offering seems likely to occur sometime within the next year the "heavy weights" of the investment world are jumping at the chance to grab a piece of the Facebook pie before all of their "friends" have a chance to beat them. In what Roben Farzad of Bloomberg Businessweek called "a profoundly unfriendly move for a company with 500 million friends," Facebook, the hugely popular social networking site, has agreed to a private deal with the investment bank Goldman Sachs and the Russian investment group Digital Sky Technologies. The agreement values the Facebook Company at $50 billion and agrees to sell a $450 million stake in the company to Goldman and a $50 million dollar stake to Digital Sky. On top of this, Goldman agreed offer about $1.5 billion of shares to a limited number of preferred clients. According to Farzad, Goldman wants to structure the deal so that Facebook remains " 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." This means that demand among Goldman clients is going to be high and it is very unlikely that any actual Facebook "friends" will get the chance to buy in.

While the deal is decidedly "unfriendly" to most of its users, it is a grand deal for Goldman. According to Gregory Zuckerman and Liz Rappaport of the Wall Street Journal, the firm's clients will pay a 4% fee to purchase Facebook shares and an additional 5% fee on any gains. Not to mention the fact that Goldman is likely to manage Facebooks IPO, which according to Zuckerman and Rappaport, will likely make the firm another $100 million in fees. However, with current revenue of only about $2 billion it might be hard to justify a valuation of 25 times that amount. According to one financial expert, cited by Jason Zweig in the Wall Street Journal, Facebook would have to grow "at least as successfully as any company in history."

This seems like a daunting task and according to Duff McDonald of Fortune.com, Facebook insiders all seem to think that same thing. New investors will be buying shares from the original holders - Accel Partners, Peter Thiel, and CEO Mark Zuckerberg. And what would prompt these insiders to sell unless they suspected that "the era of stupendous growth was over"? asks McDonald. But then again investing in a company that has grown to over 500 million "users" in just seven years may not be such a bad bet after all.

Sources:

Farzad, Roben. Facebook's Initial Private Offering

http://www.businessweek.com/magazine/content/11_03/b4211004007471.htm

Zuckerman and Rappaport. Glodman Flooded with Facebook Orders

http://online.wsj.com/article/SB10001424052748703675904576064210094944044.html

Duff McDonald. Five Reasons I'm not buying Facebook.

http://finance.fortune.cnn.com/2011/01/04/five-reasons-why-im-not-buying-facebook/