The NYT reports that Goldman Sachs (NYSE:GS) is investing $450 million of its own money into Facebook and that it’s bringing along $50 million from Digital Sky Technologies and as much as $1 billion more from its high-net-worth clients — all at a valuation of $50 billion.
The enormous sums of money involved here clearly ratify the valuation: this isn’t a handful of shares trading in an illiquid market, it’s an investment substantially larger than most IPOs.
It’s worth remembering here that only two years ago, when Microsoft (NASDAQ:MSFT) bought into Facebook at a $15 billion valuation, that sum was described in the NYT as “astronomical”. But that said, Facebook’s multiples have clearly shrunk from those heady days: in 2007, Facebook could actually use Microsoft’s $240 million to fuel its expansion. Today, it’s reportedly earning $2 billion a year, which implies to me that this is a cash-out rather than a dilutive offering. Facebook has raised, in total, about $850 million to date, and there’s no obvious need for a massive new round of funding which would dwarf that entire sum.
If Goldman is leading the buyers, then, who are the sellers? VC shop Accel Partners has been selling Facebook shares quite aggressively of late, at lower valuations than this. They could easily provide all the shares that Goldman is buying and still be left with a stake worth some $3.5 billion. And it’s entirely conceivable that some early employees might well want to diversify their holdings and have maybe a little less than 99% of their net worth in Facebook stock.
As for Goldman, it has probably bought itself the IPO mandate, which could easily generate hundreds of millions of dollars in fee income. It has also become the only investment bank which can give its rich-people clients a coveted pre-IPO stake in Facebook: the extra cachet that brings and the possible extra clients, make this investment a no-brainer. Facebook doesn’t need to stay worth $50 billion forever — Goldman just needs to engineer an IPO valuation somewhere north of that, then exit quietly in the public markets. And that is surely within its abilities.