Folks - Facebook is having their IPO without the P before our very eyes.
If it was any company other than Goldman Sachs, who is very well politically connected, the SEC would be shutting this down within 3-4 months and requiring Facebook to publish their financial results.
As it is - I still give it no more than six months before Facebook is required to start announcing results publicly.
Fascinating attempt to dodge regulatory and reporting requirements though - using Goldman as the "Investor of Record" to keep their numbers < 500.
I don't know enough about the regulations that apply here, but aren't all VCs and private equity funds subject to the same criticism? i.e. they pool private money into non-public companies?
Right - the difference, of course, is that in those funds aren't usually designed to hold shares in a single company to avoid public disclosure regulation. The closest thing that comes to my mind is the funds that arose to allow for ownership in BRK, once it got too expensive for shareholder to own even a single share (BRK is over 100K) - so these funds developed to allow people to track BRK. Of course, the company running those funds got the voting rights. For numerous reasons, this was problematic to Warren Buffet, so he created a tracking stock, BRK-B, that allowed individuals to have the ability to track/exchange for shares of BRK-A (the primary stock)
If the SEC allows Goldman to get away with this - I guarantee you that we'll see the same thing popping up for numerous other startups that don't want to engage in public disclosure, but would like a taste of that public money.
And you just know what investment bank will be servicing those companies. :-)
Start your timers - by June 5th, the SEC will be issuing some kind of ruling on this, and by Sept 5th, I wager Facebook will be requested to make a public disclosure of their finances.
I don't know of many grandma's with savings accounts that are going to be able to put down the $2 mil for the GS FB Investment Vehicle. With a $2 million buy-in, it's hardly 'public' money, these guys are going to be solidly in the accredited investor space. Public disclosure laws are designed to protect unaccredited investors being fleeced by guys like GS.
Accredited investors are what GS is going after with this vehicle, not your grandma's savings account. (GS got that when they convinced the Fed to print money like it was going out of style)
Personally I find the current state of regulations for public companies to be overly onerous, and I think that the whole unaccredited investor 'protection' is a bit of a sham considering what the SEC allows to pass for a 'public' market where winners and losers are chosen by gov't officials with the interests of investment banks and campaign contributors at heart. (The unions made out pretty good when they convinced gov't of a bailout of GM & Chrysler)
You can say what you want about GS but seriously, the Fed did bail GS out with the whole AIG fiasco.
If you knew that the Fed would bail you out every time you made a bad investment why wouldn't you act like GS does?
If you were regulated by a gov't agency, wouldn't you want to put your guys in those board seats?
GS is not evil, they're just highly adapted to the current regulatory environment. What GS does is what any rational economic agent would do in the current regulatory environment. It's the politicians and voters who need to be called out for setting up such an easily gamed system.
"To get Facebook shares, clients must agree not to sell them until 2013"
Why? Do they fear everybody selling short after? If I believe in Facebook I would keep their stock for a better growth year after year. Unless they know something we don't, or unless they know everybody will dump a hyper inflated stock.
You can't force me not to sell whenever I want, and that sole clause makes me very suspicious.
Yes they can. Companies do it all the time with employee stock purchasing programs, for instance, where you have to hold on for at least a year before flipping it.
I posted this in another thread but repeating here since more relevant to this story as well:
One of the things that goes unmentioned is that with the right feedback loops companies can ramp up quickly like never before is true. But those same loops are in place for the site to die down very quickly too.
In the valuation for such companies analysts often use a multiple times revenue (or users etc). This multiple is based on the old school model that it took time for companies to die, for competitors to emerge etc. Doubt that is true anymore. One bad move that pisses off the community and people will leave in droves too.
Social media sites have different network effects though. As the community gets larger they get watered down. They lose their individuality. Social networks on the other hand only increase in value as they get larger.
I have a harder time imagining people all of a sudden abandoning the place where they've stored all their photos with comments and tags, especially since they can't easily get them out.
Death is not zero. Death is a lack of growth. Large multiple are only justified under the assumption of a growing market. Stable/declining markets do not have a 25x multiple.
Not quite. Take MySpace again: if they can monetize well the traffic they have left, then they are worth quite a bit, despite the fact that their traffic is shrinking.
Growth in early stages is a good indicator of the potential to make money later. As growth stops, it's time to actually make money from the peak you attained. You are not dead at all then, you just can't delay any longer making actual revenue.
I think this maneuver is indicative of a broader problem related to the cost of being public. More and more companies are doing everything they can to avoid it. The administrative overhead, media scrutiny and regulatory costs are simply out of control.
As more and more companies invest resources to avoid going public, we need to look at the process and figure out why. This is similar to the tax code. The volume of people and dollars spent to legally avoid taxes is so great that there is clearly something fundamentally wrong with the system.
I'm not sure that's a good corollary. Paying taxes is something people try to avoid because it has a cash value to do so. If the cost of avoidance (both in money and the value of time, added together) is greater than the tax cost, it won't be avoided.
A company, on the other hand, can try to avoid the requirements of going public because it does not want to expose itself to the media and public scrutiny. However, the operators of that company want to avail themselves of the liquidity of public offerings--usually to cash out and, amusingly, pay taxes on the resulting earnings--but don't want to expose their financials or the details of the business. If this is the true motivation, and it seems to be the case with many Internet-related companies wanting to be quite secret about their goings-on, then Facebook and Goldman Sachs' proceeding in this manner is underhanded. It doesn't (necessarily) serve as an indictment of the system for going public, which is designed to provide protection for the investor.
"Facebook had net income of $200 million in 2009 on revenue of $777 million."
It's interesting that it cost Facebook $577 million to run in 2009. I'd love to see a break-down of where all that money is going. On the face of it, it seems like an extremely wasteful amount of money to run a site like that. $1.6 million a day in operating expenses.
Yet people are still falling over themselves to invest.
What do you consider a reasonable daily operating expense for the 3rd biggest site on the internet, that is running an extremely complex system built on amazing and reliable infrastructure internationally?
A.) There are really that many stupid billionnaires
B.) There are really that many stupid billionnaires who don't mind getting burned by GS multiple times in the past, who do their due diligence in matter of hours
C.) Goldman Sachs is breathing, a.k.a lying. (our government says corporations are human beings, ya know)
D.) Like the chorus of voices who were scoffing at MSFT's investment at $12 billion a few years back, you're not as prescient about valuations as you think you are.
It seems somewhat fitting when we imagine that Goldman Sachs' customers are the wealthy with "more money than sense," but it's not so funny when the investors turn out to be Universities, charities, pension funds, and the mutual funds trusted with your parents' retirement money...
Going back and re-reading the "Goldman's Facebook Offer" email, I can't figure out how it would get past a spam filter.
Comments
Folks - Facebook is having their IPO without the P before our very eyes.
If it was any company other than Goldman Sachs, who is very well politically connected, the SEC would be shutting this down within 3-4 months and requiring Facebook to publish their financial results.
As it is - I still give it no more than six months before Facebook is required to start announcing results publicly.
Fascinating attempt to dodge regulatory and reporting requirements though - using Goldman as the "Investor of Record" to keep their numbers < 500.
I don't know enough about the regulations that apply here, but aren't all VCs and private equity funds subject to the same criticism? i.e. they pool private money into non-public companies?
Right - the difference, of course, is that in those funds aren't usually designed to hold shares in a single company to avoid public disclosure regulation. The closest thing that comes to my mind is the funds that arose to allow for ownership in BRK, once it got too expensive for shareholder to own even a single share (BRK is over 100K) - so these funds developed to allow people to track BRK. Of course, the company running those funds got the voting rights. For numerous reasons, this was problematic to Warren Buffet, so he created a tracking stock, BRK-B, that allowed individuals to have the ability to track/exchange for shares of BRK-A (the primary stock)
If the SEC allows Goldman to get away with this - I guarantee you that we'll see the same thing popping up for numerous other startups that don't want to engage in public disclosure, but would like a taste of that public money.
And you just know what investment bank will be servicing those companies. :-)
Start your timers - by June 5th, the SEC will be issuing some kind of ruling on this, and by Sept 5th, I wager Facebook will be requested to make a public disclosure of their finances.
I don't know of many grandma's with savings accounts that are going to be able to put down the $2 mil for the GS FB Investment Vehicle. With a $2 million buy-in, it's hardly 'public' money, these guys are going to be solidly in the accredited investor space. Public disclosure laws are designed to protect unaccredited investors being fleeced by guys like GS.
Accredited investors are what GS is going after with this vehicle, not your grandma's savings account. (GS got that when they convinced the Fed to print money like it was going out of style)
Personally I find the current state of regulations for public companies to be overly onerous, and I think that the whole unaccredited investor 'protection' is a bit of a sham considering what the SEC allows to pass for a 'public' market where winners and losers are chosen by gov't officials with the interests of investment banks and campaign contributors at heart. (The unions made out pretty good when they convinced gov't of a bailout of GM & Chrysler)
You can say what you want about GS but seriously, the Fed did bail GS out with the whole AIG fiasco.
If you knew that the Fed would bail you out every time you made a bad investment why wouldn't you act like GS does?
If you were regulated by a gov't agency, wouldn't you want to put your guys in those board seats?
GS is not evil, they're just highly adapted to the current regulatory environment. What GS does is what any rational economic agent would do in the current regulatory environment. It's the politicians and voters who need to be called out for setting up such an easily gamed system.
Private starts with a P. Privileged does too.
"To get Facebook shares, clients must agree not to sell them until 2013"
Why? Do they fear everybody selling short after? If I believe in Facebook I would keep their stock for a better growth year after year. Unless they know something we don't, or unless they know everybody will dump a hyper inflated stock.
You can't force me not to sell whenever I want, and that sole clause makes me very suspicious.
Yes they can. Companies do it all the time with employee stock purchasing programs, for instance, where you have to hold on for at least a year before flipping it.
I posted this in another thread but repeating here since more relevant to this story as well:
One of the things that goes unmentioned is that with the right feedback loops companies can ramp up quickly like never before is true. But those same loops are in place for the site to die down very quickly too.
In the valuation for such companies analysts often use a multiple times revenue (or users etc). This multiple is based on the old school model that it took time for companies to die, for competitors to emerge etc. Doubt that is true anymore. One bad move that pisses off the community and people will leave in droves too.
Digg anyone?
Social media sites have different network effects though. As the community gets larger they get watered down. They lose their individuality. Social networks on the other hand only increase in value as they get larger.
I have a harder time imagining people all of a sudden abandoning the place where they've stored all their photos with comments and tags, especially since they can't easily get them out.
Yeah, because MySpace is totally dead right? Oh wait, it's still the 51st largest site on the web. Takes a while to die online too, it seems.
Death is not zero. Death is a lack of growth. Large multiple are only justified under the assumption of a growing market. Stable/declining markets do not have a 25x multiple.
Not quite. Take MySpace again: if they can monetize well the traffic they have left, then they are worth quite a bit, despite the fact that their traffic is shrinking.
Growth in early stages is a good indicator of the potential to make money later. As growth stops, it's time to actually make money from the peak you attained. You are not dead at all then, you just can't delay any longer making actual revenue.
In finance-speak, industries with rapid change that are difficult to forecast should be valued at very high discount rates.
This requires even more extraordinary growth rates to justify a given valuation, since future cash flows become worth that much less.
"It's a blowout," said the guy playing NBA Jam on his Goldman Sachs-issued Sega Genesis.
I think this maneuver is indicative of a broader problem related to the cost of being public. More and more companies are doing everything they can to avoid it. The administrative overhead, media scrutiny and regulatory costs are simply out of control.
As more and more companies invest resources to avoid going public, we need to look at the process and figure out why. This is similar to the tax code. The volume of people and dollars spent to legally avoid taxes is so great that there is clearly something fundamentally wrong with the system.
I'm not sure that's a good corollary. Paying taxes is something people try to avoid because it has a cash value to do so. If the cost of avoidance (both in money and the value of time, added together) is greater than the tax cost, it won't be avoided.
A company, on the other hand, can try to avoid the requirements of going public because it does not want to expose itself to the media and public scrutiny. However, the operators of that company want to avail themselves of the liquidity of public offerings--usually to cash out and, amusingly, pay taxes on the resulting earnings--but don't want to expose their financials or the details of the business. If this is the true motivation, and it seems to be the case with many Internet-related companies wanting to be quite secret about their goings-on, then Facebook and Goldman Sachs' proceeding in this manner is underhanded. It doesn't (necessarily) serve as an indictment of the system for going public, which is designed to provide protection for the investor.
"Facebook had net income of $200 million in 2009 on revenue of $777 million."
It's interesting that it cost Facebook $577 million to run in 2009. I'd love to see a break-down of where all that money is going. On the face of it, it seems like an extremely wasteful amount of money to run a site like that. $1.6 million a day in operating expenses.
Yet people are still falling over themselves to invest.
What do you consider a reasonable daily operating expense for the 3rd biggest site on the internet, that is running an extremely complex system built on amazing and reliable infrastructure internationally?
Doesn't the strong response demonstrate that the offering price was too low?
Can we finally get some momentum behind getting rid of Sarbones-Oxley? It's not helping, and it seems to be making things worse.
Either
A.) There are really that many stupid billionnaires
B.) There are really that many stupid billionnaires who don't mind getting burned by GS multiple times in the past, who do their due diligence in matter of hours
C.) Goldman Sachs is breathing, a.k.a lying. (our government says corporations are human beings, ya know)
Or:
D.) Like the chorus of voices who were scoffing at MSFT's investment at $12 billion a few years back, you're not as prescient about valuations as you think you are.
D.) All of the above.
It seems somewhat fitting when we imagine that Goldman Sachs' customers are the wealthy with "more money than sense," but it's not so funny when the investors turn out to be Universities, charities, pension funds, and the mutual funds trusted with your parents' retirement money...
Going back and re-reading the "Goldman's Facebook Offer" email, I can't figure out how it would get past a spam filter.
G.S. had the placements before the announcement "leaked."