Sunday, January 23, 2011

How Goldman Wins the Battle at Facebook Gulch

Review the bidding:Goldman Sachs (and a partner) offered to pay $500 million for a slice of Facebook which the press tells us implies a total valuation for the company of $50 billion.  Goldman says it intends to flog offer the stock to a small circle of friends.  Then poor timorous Goldman says no wait, we might get in trouble the bureaucrats; we'll offer it only to investors overseas.  Jonathan Macey blames the bullies in Washington and calls it "The SEC's Facebook Fiasco."  Macey does have the good grace to concede that Goldman doesn't lose a penny by its shift of strategy, but I'll go a step further: for Goldman I'd call it a big win.

 For starters, I haven't noticed anybody explaining just how $500 mill translates into $50 bill, but I suppose it goes like this: 500m/50b = 0.01  = one percent. Goldman is buying one percent of Facebook (yes?), so the whole business must be 500m/0.01. Yes? Well: yes if we assume a flat demand curve; if, that is, we assume that all shares of Facebook would sell for the price of each share of Facebook.

Of course we won't know because nobody is offering to sell all of Facebook, and will no until sometime a lot closer to the next ice age.   What it does do is ramp up the hubba hubba around what is already the hottest current property on the investment scene.

I know memories are short but isn't this beginning to sound a lot like the forces that drove the dot-com bubble in the 90s?   You'd hype the stock, you'd have your "public" offering,  but then nobody would be able to find any shares.  You'd actually release five, maybe 10, percent of all shares.  So everybody is avid for a product that very nearly does not exist.  The consequence is that you capture the most optimistic investors at the highest possible price.  Everyone else is left just kicking themselves that they didn't get a piece and just aching for the day when the finally get to climb on board.

So what have we get here?  Small (indeed, tiny) float, check; agressive hype ($50 billion!) and an old-fashioned barrel-house tease (C'mon you know you want it!  Oops, you can't have it just yet!  Watch while somebody else has some fun!).

Of course I haven't a clue precisely what will happen next.  I'm assuming public offering.  I'm assuming a blaze of publicity.  I'll bet any number of these first-round investors will come climbing over the bodies of their grandmothers to get in the second chance.  And one way or another, I'm assuming that Goldman will be there at every juncture, its palm open and out and on its face a contented grin.

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