This Facebook-Goldman Deal Reeks — Here’s Why

From its origins as a social network for Harvard students to the privileged backgrounds of its founders to the condescending way that it has at times engaged with both developers and users, Facebook has often seemed a little superior.

Facebook’s pact with Goldman – which has committed $450 million to the company at a $50 billion valuation and created a related, $1.5 billion special purpose investment vehicle, marketed exclusively to its “high net-worths” — does little to dispel that notion. Through the Goldman deal, Facebook is cementing the impression that it doesn’t owe its users anything.

As someone who has posted more than a few silly photos of herself and her family on Facebook, I beg to differ.

Facebook profited because of the user-generated content that people like me have posted on the site. The notion that only millionaires benefit in this deal is repellent, especially when the bank serving up the deal forbids its own employees from looking at the site.

When Google went public in 2004, it steered clear of sweetheart deal-making, settling instead on a Dutch auction process that was open to all bidders. It had numerous reasons for doing so, including that Dutch auctions can theoretically reduce first day price spread and leave more of the proceeds in the coffers of the issuer than traditional IPOs, which typically direct five to 10 percent of the total value to underwriters.

But Google’s process also seemed bent on ensuring that whether an investor had $100 or $100 million, he or she could get a piece of the company. Indeed, when I spoke recently with former Wall Street analyst Lise Buyer, who helped take Google public, she said that Google “went out of its way to help people who’d gotten Google to where it was at the time of the offering.”

I’d be thrilled if Facebook followed in Google’s footsteps. Not only is Facebook uniquely attractive to retail investors because of the nature of its product, which hundreds of millions of people know intimately, but it has the leverage to pull off a Dutch auction, which isn’t the case for many companies. A meaningful side benefit would be an opportunity for Facebook to reward the little people who made Facebook the hugely valuable property that it is.

Buyer, who today runs the IPO advisory group Class V, generously calls the divergent approaches of Google and Facebook “fascinating.” I wouldn’t be so kind. Deals like that of Facebook-Goldman reek of an old boys club way of doing business. They are exclusionary and elitist. For a company that prides itself on its connection to its users, Facebook’s decision to tie up with a bunch of millionaires is tone-deaf to the extreme.

12 Comments

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  • Facebook is repellent on so many fronts. Fathers, brothers, sisters, mothers, sons and daughters have sacrificed their lives in combat so that Americans can live private lives. Facebook claims to be the ultimate expression of free speech – instead it has become the ultimate source of privacy invasion. The sad part is – users have willingly sacrificed their privacy like lemmings running off the cliff. The Goldman deal cements my opinion that Facebook is really digital heroin and people all over the world are addicted.

  • Two things:
    1 — Bob R. — got an example in the past 50 years of combat troops protecting Americans’ privacy rights? I didn’t think so. I don’t recall any Afghani attempts to steal my credit card info, and as far as I know, we haven’t invaded Nigeria yet.
    2 — Connie — but what do you REALLY think? ;)

  • Your real quarrel is with the SEC. Facebook understandably does not want to undertake the hassles and expenses of being a public company, so it is raising capital privately. Our paternalistic government has decided that only rich people are sophisticated enough to participate. As for the statement that “the bank serving up the deal forbids its own employees from looking at the site,” this is just a gratuitous attack. Playboy, InBev and Philip Morris have external professional services advisors, including bankers. Do you think those advisors allow their employees to partake of their clients’ products and services on company time? Certain activities are not appropriate for work hours.

  • Interesting contrast between Goog & fB ‘offering’

    Also note that Goog has a proven gangbuster very ROI focused revenue model, whereas fB is selling display ads which have questionnable ROI, dropping CPM and tend to be very cyclical and fickle. While I think fB is a very valuable property, giving it a 25X multiple considering the characteristics of its current revenue base is hallucination.

    On the other hand, haven’t people learned about Goldman, its SPV, and these private off SEC transactions in opaque hard to value asset class? I mean once bitten, shame on me, twice…

  • F@#k Facebook – Goldman Sachs’ $50billion valuation is BS http://ht.ly/3zrPR (via @JBishara)

  • hi, ben!
    i’m really not quarreling with the sec here (that’s a separate story), but i like that last line of yours.:)

  • Is there anything we know of the deal which forbids Facebook carrying out an IPO via dutch auction? Aside from the assumption that this Goldman deal is all about a ‘traditional’ IPO and the associated fees etc.? I know it is a bit of a stretch to imagine GS leaving IPO pennies on the table, but if a Dutch auction were the most promising way for Facebook to raise money wouldn’t the existing shareholders (e.g.. the ones that GS is bring in now) demand this route? Or will GS naturally put their own interests before their clients in a BAU way?

  • hi, nic, yes, it’s a huge stretch. goldman would lose out on much more than pennies on the table. and while another option would seemingly(?) be to increase the amount of float dedicated to retail investors (a weak play by a lesser company but not an issue here), that’s unlikely, given the additional work retail investors involve.

    there’s nothing to preclude facebook from carrying out an ipo via a dutch auction. its history and ever-deepening ties to goldman make it very hard to imagine, tho, unless they’re just waiting to surprise the rest of us.:)

  • Connie, good editorial. Do Google and FB have different values? Definitely. Have Google and FB taken different approaches to their growth? For sure.

    A couple comments though:

    1) Let Goldman and their private clients risk their money on FB!

    Facebook is an incredibly risky proposition for retail investors, and even more risky at a $50 billion valuation. To say that “Facebook uniquely attractive to retail investors because of the nature of its product” is both true and scary. Investing in a business at 25x it estimated revenues is not exactly a sweetheart deal.

    2) As much as the dutch auction IPO of Google was a landmark transaction, the great majority of the IPO was placed with institutional investors anyway (and probably also private banking clients). Even today, 80% of the float is owned by institutional investors according to Yahoo Finance. By comparison, the same stat for MSFT is 74% and VZ is 54%. All the little guys had to buy in the aftermarket at a premium to the IPO price (still have done well since, obviously).

    3) Yes, it is definitely cheeky that the private placement is being offered to GS PB clients only, but that’s probably because it would be hard to raise a full $1.5 billion from proper private equity / institutional investors (including GS Capital Partners).

  • why not prompt the first virtual revolution by motivating users to ask for a piece of the action.. say get at least 20 bucks each since we each are valued at 100 bucks roughly ..
    plus i remember facebook being valued at 10$ billion a few months ago. 50b is clearly a big bubble.

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