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Is Facebook Really Worth $50 Billion?

Publication Date: 
January 06, 2011
Source: 
The Economist

Professor Joseph Grundfest is quoted in "The Economist" in regards to Goldman Sachs recent $500 million investment in Facebook:

IN 2009 Rolling Stone described Goldman Sachs, an investment bank, as “a great vampire squid” that likes to stick its “blood funnel” into anything that can make it money. This week the squid inked yet another high-profile deal. Together with Digital Sky Technologies (DST), a Russian group, Goldman invested a total of $500m in Facebook, valuing the world’s most popular social network at a whopping $50 billion. The bank is also planning to set up a fund it will manage that will pump up to $1.5 billion more from wealthy investors into the company.

For Facebook, the deal provides a mountain of extra cash to invest in things such as new data centres and acquisitions. It gives it fuel for further growth without the hassle of listing its shares. For Goldman, the transaction represents an opportunity to stick its “funnel” into an internet firm that makes investors drool. As well as benefiting from any further appreciation in Facebook’s value, the bank plans to suck up fees for managing the new fund. And it is no doubt hoping that by cosying up to Facebook’s top brass it is boosting its chances of leading an eventual initial public offering (IPO) of the company’s stock.

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Facebook and Goldman seem to have the letter of the law on their side. Joseph Grundfest, a professor at Stanford Law School and a former SEC commissioner, points out that the rule in question states very clearly that a fund such as the one Goldman has in mind should be treated as a single shareholder. “If someone says Goldman is violating the law, then they obviously don’t know the law,” he says. Were regulators to interpret the rule in any other way, it would have far-reaching consequences for, say, the venture-capital industry, in which funds with multiple investors routinely take stakes in private firms.