Facebook deal with Goldman puts its value at $50 billion

The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google. The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions — all without being a publicly traded company. The investment may also allow earlier shareholders, including Facebook employees, to cash out at least some of their stakes.

The new investment comes as the Securities and Exchange Commission has begun an inquiry into the increasingly hot private market for shares in internet companies, including Facebook, Twitter, the gaming site Zynga and LinkedIn. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.

The new money could add pressure on Facebook to go public even as its executives have resisted. The popularity of shares of Microsoft and Google in the private market ultimately pressured them to pursue initial public offerings.

So far, Facebook’s chief executive, Mark Zuckerberg, has brushed aside the possibility of an initial public offering or a sale of the company. At an industry conference in November, he said on the topic, “Don’t hold your breath.” However, people involved in the fund-raising effort suggest that Facebook’s board has indicated an intention to consider a public offering in 2012.

There has been an explosion in user interest in social media sites. The social buying site Groupon, which recently rejected a $6 billion takeover bid from Google, is in the process of raising as much as $950 million from major institutional investors, at a valuation near $5 billion, according to people briefed on the matter who were not authorised to speak publicly.

“When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public,” said Chris Sacca, an investor in Silicon Valley who is a former Google employee and an investor in Twitter. “This time, the Street is smartening up. They realise there are true growth businesses out here. Facebook has become a real business, and investors are coming out here and saying, ‘We want a piece of it.”’

The Facebook investment deal is also likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Under the terms of the deal, Goldman has invested $450 million, and Digital Sky Technologies, a Russian investment firm that has already sunk about half a billion dollars into Facebook, invested $50 million.

Goldman has the right to sell part of its stake, up to $75 million, to DST. For DST, the deal means its original investment in Facebook, at a valuation of $10 billion, has gone up fivefold.

In a strong position

Goldman’s involvement means it may be in a strong position to take Facebook public when it decides to do so in what is likely be lucrative and high-profile deal.

As part of the deal, Goldman Sachs is expected to raise as much an additional $1.5 billion from investors for Facebook at the $50 billion valuation.

In a rare move, Goldman is planning to create a ‘special purpose vehicle’ to allow its high-net worth clients to invest in Facebook, these people said. However, the SEC requires companies with more than 499 investors to disclose their financial results to the public. Goldman’s proposed ‘special purpose vehicle’ would seek to get around such a rule because it would be managed by Goldman and be considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the SEC will approve such an arrangement.

Already, a thriving secondary market exists for shares of Facebook and other private internet companies. In November, 40 million worth of Facebook shares changed hands on a private exchange called SecondMarket. According to SharesPost, Facebook’s shares value has roughly tripled in value over the past year to $42.4 billion. One investor appears to have bought Facebook shares at a price that implies a valuation of $56 billion.

But the credibility of one of Wall Street’s largest names, Goldman, may help justify the company’s worth.

Facebook also surpassed Google as the most visited website in 2010, according to the internet tracking firm Experian Hitwise.

Facebook received 8.9 per cent of all web visits in the United States between January and November 2010. Google’s main site was second with 7.2 per cent, followed by Yahoo Mail service, Yahoo’s web portal and YouTube, part of Google.

For Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.

Even as Goldman takes a stake in Facebook, its employees may struggle to view what they invested in. Like those at most major Wall Street firms, Goldman’s computers automatically block access to social networking sites, including Facebook.