How Goldman Sachs could make $2.8 billion from Facebook

How Goldman Sachs could make $2.8 billion from Facebook

Summary: Goldman Sachs could be in for a bonanza in a Facebook IPO. How does this work?

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In my earlier piece I hinted that Goldman Sachs has a vested interest in building a case for a $50 billion valuation for Facebook that has nothing to do with the open market valuation. Larry Dignan thinks this is the pre-cursor to an IPO. Mark Zuckerberg has been quoted as saying that an IPO is not on the cards anytime soon. Peter Thiel, who originally staked $500,000 in Facebook said in September that Facebook would not IPO before 2012.

Regardless of the timeframe, how much does Goldman make on the deal? The answer is simple.

According to Bloomberg, Goldman took the lion's share of the 2009 $923 million IPO fees:

Banks increased fees for initial share sales by 62 percent to 5.63 percent from the lowest level on record, even as the amount that U.S. companies raised from IPOs decreased by almost half to $16.4 billion this year, according to Bloomberg data. While the biggest surge in stocks since the Great Depression revived the IPO market and helped enrich bankers, almost 40 percent of offerings sold by underwriters in the second half of 2009 have left buyers with losses, the data show.

Crunch the numbers: at a $50 billion valuation, with Goldman in the box seat as lead banker to an IPO and at the rates quoted in 2009, then it could pocket $2.8 billion gross in fees. And that's on top of whatever it creams off the $1.5 billion fund it is creating as part of the deal that sees it currently investing $450 million. Assuming an IPO in the next 12 months then by my reckoning, Goldman's 'investment' nets a 6x return.

If Goldman is successful (and remember that the Special Purpose Vehicle covering the $1.5 billion has to get past the SEC first but honestly - do they care?) then what happens to the Twitter's of this world? Does its investors start clamoring for an exit? You bet.

That can only spell one thing: bubble times are here again.

Side note: Does anyone now think Zuckerberg is running Facebook?

Topic: Social Enterprise

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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7 comments
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  • RE: How Goldman Sachs could make $2.8 billion from Facebook

    Serious question here: neither article indicates what exactly gives Facebook it's value. In my post to the other article, I assumed it is advertising, but I can't even justify $50M on that business model.<br><br>What exactly is being valued at $50B?<br><br>Someone please explain this to me. Or is it indeed a pump and dump?
    7mgte
    • RE: How Goldman Sachs could make $2.8 billion from Facebook

      @7mgte It's the growth premium and the fact that Facebook is going to give Google a run. The bet is that Facebook's model can catch up with its growth.
      Larry Dignan
      • RE: How Goldman Sachs could make $2.8 billion from Facebook

        @Larry Dignan
        Okay. Growth premium on what? Give Google a run on what? Is it advertising?

        I am a casual user of Facebook. Would I pay for it? No. What is it that Facebook provides? And to whom?

        Food has "value" becuase you need to live, therefore you are willing pay for it and it therefore has value. What is it that Facebook has that has any value?

        And if you say "advertising potential", then we are back to pump and dump. The only people I hear say that advertising is worth anything are advertisers.

        Not so long ago I conducted a straw poll around the office and with friends. I asked how much advertising influenced them in terms of buying products. In broad terms, advertising had very little influence. Yeah, some people remembered funny commercials, but most of the time no one could remember the product.

        If Facebook is valued at $50B for advertising potential, run. Run away. Run away very quickly.
        7mgte
      • In other words...

        @7mgte
        ABC, CBS, NBC, Fox...all the television stations that broadcast over the airwaves...are worthless. People don't pay for the service. Sure, they make billions of dollars each year in advertising, but that's just pump and dump. This whole television thing is just a fad with no value.
        jasonp@...
      • Larry, since they bought a percentage of the company for 500 million, the

        evaluation is rather easy. They should have gotten right at 1%.Dignan
        DonnieBoy
    • I would assume, from the 500 million investment, they got 1% of Facebook.

      Thus, 100 x 500 million is 50B.
      DonnieBoy
  • @jasonp...you are mistaken

    All the televisions that broadcast over the airwaves receive super nice cash flow from the cable and satellite companies. Both cable and satellite companies have tried to argue for years that if consumers can have the programming for free why should they pay huge amounts of money to carry the same programming to the same customers...no such luck. You need to try a better argument...where is value of facebook? $50B for a web site that allows people to talk about how they passed gas at a restaurant last night? I think Facebook is smart in postponing its IPO as many people would short the heck out of this stock as soon as it hit the market. Bubble days are here again, somepeople are too blind to see it...

    No...many of us do not think Zuckerberg runs Facebook. Yes...many of us do think he conned his friends back in college.
    mikies