50 Billion Reasons Why Facebook Is Not Worth $50 Billion

It seems Facebook, the social network personally endorsed by God, is now worth more than eBay, Yahoo, and Time Warner -- all without selling a single share to Joe or Jane Public. The reason: Wall Street uber-bank Goldman Sachs, which just pumped another $450 million in venture capital into Facebook, leading to a valuation estimated at a cool $50 billion.

You remember Goldman Sachs, right? The ones who received billions in U.S. taxpayer bailout money and promptly issued billions of dollars in bonuses to employees? The ones who admitting to bamboozling investors with worthless subprime mortgage funds in 2007 and ended up paying record fines of $550 million -- a fraction of the profits accrued? The ones in $2,000 Armani suits who make the Mafia look like Mouseketeers?

[ Out with the old and in with the new! Keep score with Cringely's 12 tech predictions for 2011. | For a humorous take on the tech industry's shenanigans, subscribe to Robert X. Cringely's Notes from the Underground newsletter. ]

Those guys. They're the ones Facebook jumped in bed with -- so if Goldman Sachs says Facebook's worth $50 billion, how can we mere mortals dispute that?

Also sleeping with Facebook: Digital Sky Technologies, a Russian investment firm that is largely responsible for foisting Zynga (aka Farmville et al.) upon the world. The company dropped another $50 million into Facebook's pockets, bringing its total investment in the social network to around half a billion dollars.

DST is allegedly controlled by a Russian oligarch and Putin pal named Alisher Usmanov, who is described thusly by Gawker:

Usmanov... who reportedly owns 32 percent of DST, comes with the sort of unsavory press clippings worthy of a long-surviving oligarch in anarchic, organized-crime-ridden Russia: He's been accused by a former British ambassador [8] of being a "gangster and racketeer" and of close ties to mafia drug trafficking and, as we've reported previously, controversially tried to censor bloggers who linked to news of the accusations.

How do you feel about sharing all your personal information with Facebook now?

According to the New York Times Dealbook blog, the investment gives Goldman Sachs the inside track on bringing Facebook public, if and when it decides to do an IPO. In the meantime, Goldman is creating a "special purpose" investment vehicle for millionaires who want to get in on the bottom floor before the elevator is officially open to the public.

Hmm, that sounds eerily familiar. Wasn't that subprime mortgage vehicle -- the one Goldman Sachs sold as a Ferrari but turned out to be a jalopy -- also a "special purpose" investment?

To wit, per the Times:

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

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. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman's proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the S.E.C. will look favorably upon the arrangement.

Goldman Sachs and Facebook are hoping to receive most of the benefits of public stock ownership (buckets of money), with none of those nasty disclosure requirements -- like whether the company actually makes a profit, if key executives are leaving, if directors are dumping their shares, or if the company has been sued for anything that could severely impact its bottom line.

In other words, Facebook wants you to share all of your secrets, but politely declines to share its own. If you dig too closely into its investors, you may end up accidentally falling out of a window or possibly an airplane.

Facebook isn't the only company playing fast and loose with the notion of "public." The SEC is apparently investigating the trading of private shares in hot Net companies like Twitter, Zynga, and LinkedIn. But Facebook is the great blue whale in this fish tank.

I am not a stock broker or a securities lawyer (thank God). But if someone out there in Cringeville can explain to me how this isn't illegal, I'd love to hear it.

I'm not saying Facebook isn't the greatest thing since individually wrapped slices of American cheese. But the notion that it's worth more than companies listed above without ever demonstrating to the world how much dosh those little 125-by-125 ads bring in is, well, pretty cheesy in itself.

And the pedigrees of its two closest friends make me a little green around the gills. Just sayin'.

Subscribe to the Daily Downloads Newsletter

Comments