The deal, announced in a report in The New York Times Sunday night, makes Facebook worth more than Internet-related companies like eBay Inc. (Nasdaq: EBAY), Yahoo! Inc. (Nasdaq: YHOO) and Time Warner Inc. (NYSE: TWX). It'll give the company a competitive edge in the tech arena and allow it to pursue more acquisitions.
Digital Sky Technologies, a Russian investment firm that has already put about half a billion dollars into Facebook, also invested an additional $50 million in the deal. Goldman has the right to sell up to $75 million of its stake to Digital Sky. Digital Sky started its involvement in the social networker in 2009 with a $200 million investment and now has about a 10% stake through stock purchases from Facebook employees.
The deal highlights the booming popularity of social media sites like Facebook, Twitter and Groupon - all of which are gaining increased attention from investors. Facebook jumped ahead of Google Inc. (Nasdaq: GOOG) as the most-visited Web site in 2010, according to Internet research firm Experian Hitwise.
Goldman is planning to create a "special purpose vehicle" to allow high-net-worth clients to invest in Facebook, sources speaking on the condition of anonymity told The Times. The sources said Goldman could pool money - as much as $1.5 billion - from thousands of investors for a stake in Facebook.
Analysts estimate that Facebook could bring in as much as $2 billion in annual revenue. With the credibility of Goldman's name behind it, Facebook could get an even bigger boost in worth this year.
Goldman's involvement with the most popular growth companies has been a theme in the financial giant's history. The company helped Ford Motor Co. (NYSE: F) with its IPO in 1956. The Ford family then became Goldman's first private wealth management clients.
Goldman took an early interest in Ralph Lauren's clothing empire, investing a 28% stake in it in 1994. When the company went public in 1997 as Polo Ralph Lauren Corp. (NYSE: RL), Goldman did the underwriting. It also helped founder Ralph Lauren sell $1 billion in stock last year.
EBay also turned to Goldman to handle its IPO, and Goldman has since made millions of dollars in fees from managing former Chief Executive Officer Meg Whitman's assets.
JPMorgan Chase & Co. (NYSE: JPM) analyst Kian Abouhossein told Barron's that Goldman could have $15 billion in excess capital next year, helped by a boost from its asset management and underwriting businesses.
Facebook IPO Talk Grows Amid SEC ScrutinyAnalysts wonder if the deal is a precursor to Facebook going public despite Chief Executive Officer Mark Zuckerberg's denial of a 2011 initial public offering.
Speculators think private market popularity in Facebook could increase pressure on the company to go public sooner than later. In November, $40 million worth of Facebook shares were involved in a private exchange called SecondMarket. Similar private market interest pushed Microsoft Corp. (Nasdaq: MSFT) and Google into IPOs.
Some also think that the Securities and Exchange Commission could consider Goldman's investment vehicle as a breach of the SEC's 500 shareholder rule, which requires companies with more than 499 investors to publicly disclose their financial reports. Goldman's Facebook investment may circumvent the rule because Goldman would be considered the only investor.
The SEC has sent information requests to participants in privately held Internet companies to start investigating this growing market. Some investors think the inquiry will push Facebook to go public sooner than Zuckerberg has led everyone to believe, since the SEC is likely to find there are far greater than 500 investors and the company should publicly disclose its financials. Although an IPO doesn't have to follow, many see it as the logical step.
But some think that the greater requirements and attention that come with being publicly traded will deter Zuckerberg from rushing his IPO plan, making 2012 the earliest estimate for Facebook to go public. Facebook also has no need to raise capital - a common reason for an IPO - with its popularity in private exchanges.
The private market has been booming lately as the tech world rebounds from the recession. Companies like Facebook, Twitter, online game site Zynga and business networker LinkedIn have piqued buyers' interest, and the number of transactions on private exchange markets is growing each month.
Facebook is SecondMarket's most actively traded company, and its value has more than tripled in the past year. Twitter recently received $200 million in venture financing.
Part of what's fueling the private market growth is that Wall Street is experiencing a shift in IPO business, as companies - especially in the tech sector - take longer to hit public markets.
"We are serving a growing need," David Weir, chief executive officer of SharesPost, an online marketplace for private investments, told The Times. "A decade ago, these companies would be public now. Investors can now buy into these businesses and sellers can exit their already valuable stakes."
Most of the sellers consist of former employees of the companies, or venture capitalists who specialize in early-stage investing and are ready to move on. Most of the buyers are hoping to get in on the next big tech giant before the shares are open to the public.
SecondMarket is expected to execute about $400 million in trades involving about 40 private companies this year. That's about four times as many trades as the company executed in 2009.
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