David Pauly
Goldman Sachs has had a stab in the dark, and helped itself in the process, writes David Pauly.
Can Facebook, that monument to wasted time, really be worth $US50 billion? We’ll have to take Goldman Sachs’s word for it.
There are no public audited numbers for Facebook to back up the investment bank’s estimate of the company’s value.
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News has leaked that Goldman, supposedly the smartest Wall Street firm, will buy $US450 million of stock in Facebook, with Digital Sky Technologies, which invests in start-ups and is partly owned by Goldman, buying another $US50 million.
The anonymous folks who put out these numbers said the deal sets a value for Facebook equal to that of Boeing.
Goldman is clearly capitalising on Wall Street’s latest diversion: a semi-public sharemarket for private companies.
Several firms now offer shares of tightly held companies or offer estimates of their value, or both. Featured in this new market are Facebook, where users share private information and photos among themselves; Twitter, where you can follow your favourite celebrities as they desecrate the language; and Groupon, an electronic coupon-clipper.
All this fuss fires up the market for floats of these companies well in advance of any actual sales.
Putting a sky-high but hard to verify value on Facebook will probably boost the value of the shares Goldman is buying even higher on the shadow market, and spark extraordinary gains when Facebook’s 26-year-old chief, Mark Zuckerberg, finally decides on a float. Last week Facebook said it would start reporting financial information in April 2012, a prelude to going public.
There is another lucrative piece of the current deal for Goldman Sachs. It plans to sell an additional $US1.5 billion in Facebook shares to its partners and wealthy clients.
Goldman will take a 4 per cent placement fee for selling the shares, 5 per cent of any gain in the stock and an annual servicing fee, according to two clients who have been offered shares.
Goldman’s investment in Facebook should also give the firm an inside track as the underwriter whenever the social networking company goes public.
A successful float of Facebook is almost certain. Its internet site got more hits in the January-November period last year than Google’s main site, according to a New York tracker, Experian Hitwise.
Facebook says it has more than 500 million users. Last week the company said that in the first nine months of 2010 it earned $US355 million on sales of $US1.2 billion. Zuckerberg has become a celebrity, recently giving $US100 million to the schools in Newark, New Jersey.
While Facebook looks more like a Google, which went public in 2004 and has climbed since, it is being insanely overvalued, as were dotcom disasters like EToys and Webvan.
If you believe the company is worth $US50 billion, take another leap. Using Facebook’s numbers from last week – the best we have in the absence of complete financial reporting – we might guess it made about $US500 million for the year. That would mean its shadow market value was about 100 times earnings. Google’s price-earnings ratio is 25.
Investors with short memories will pay whatever the shadow market and Goldman Sachs say they should.
Back in 2000 Cisco Systems, then already the dominant company in computer network gear, had a P/E approaching 200. It is now 15.
There is another even more down-to-earth problem for the company. Analysts see Facebook as a threat to Google as a gatherer of advertising revenue. Who is to say a few years from now another start-up won’t pose a similar threat to Facebook?
Source: www.smh.com.au
