Goldman Sachs makes friends with Facebook in $450m deal

Site valued at $50bn as bank invests its own cash – and tells richest clients to do the same
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The Independent Online

Status update: the world's most popular social networking website has been caught in the suckers of an institution otherwise known as the Vampire Squid. From now on, Facebook will be brought to you in association with Goldman Sachs.

The investment bank kicked off 2011 by taking a $450m (£291m) stake in Silicon Valley's brightest star, in an opaque deal that values the firm at around $50bn and doubles the net worth of Mark Zuckerberg, who owns just over a quarter of the firm, to the giddy sum of $14bn.

Goldman's cash gives Facebook the ability to carry on growing at its current exponential rate – hiring expensive employees, developing new products and buying smaller start-ups – without having to jump through regulatory hoops which would accompany a traditional stock market flotation.

A Russian investment house, Digital Sky Technologies, has also put in $50m as part of the same agreement, according to The New York Times, which broke news of the deal. The money also means that some of Facebook's earlier employees can cash in all or part of their stakes in the company.

It's bad news, however, for normal investors hoping to secure a slice of the extremely fashionable pie. They will have to wait for a flotation, which is not expected to come until 2012 and about which Mr Zuckerberg said in November, "don't hold your breath".

Until then, some of the few people able to join the party are "high net worth" clients of Goldman Sachs. They will be allowed to take an additional $1.5bn in the firm, also at the $50bn overall valuation, through "a special purpose vehicle" which the investment bank will control and manage.

The US Securities and Exchange Commission (SEC) last week announced that it was launching an investigation into the private market for shares in companies such as Facebook, Twitter and Zynga, the online gaming firm.

Although none of the firms are yet publicly traded – so are not required, for example, to publish their profit and loss accounts – electronic trading platforms are being widely used to connect eager buyers and willing sellers (such as company employees) of stock that has already been privately issued.

There are fears that this practice has created an opaque and unregulated market prone to huge bubbles – the paper value of Facebook more than doubled in 2010 – but is devoid of proper liquidity or investor information. If commercial circumstances change, investors could be left with catastrophic losses.

Among other things, the SEC plans to look at whether privately-traded tech firms are properly using a loophole in the law to bypass public disclosure rules. For example, US law requires companies with more than 499 investors to publish their financial results.

Facebook says it does not need to comply with this rule, since it has less than the magic number of 499 stakeholders. But to get away with this claim, it will have to count funds such as Goldman's "special purpose vehicle", which is likely to pool cash from possibly thousands of people, as a single investor.

The other intriguing player in Facebook's future is the Russian investment firm Digital Sky Technologies, owned by Alisher Usmanov, the Uzbek billionaire with a significant stake in Arsenal football club. Digital Sky bought 2 per cent of Facebook for $200m in 2009, and has since increased its stake to around 10 per cent by buying shares from employees. It has already made a profit of around 500 per cent after a year in which Facebook overtook Google to become America's most visited website, with 8.9 per cent of the country's internet traffic, and Mark Zuckerberg was named Time magazine's "person of the year".

Ironically, all the major players are hiding behind a veil of secrecy which seems at odds with Facebook's spirit of openness: neither Goldman, nor Digital Sky, nor Facebook itself would comment on the new deal yesterday. And Goldman Sachs still blocks its staff from accessing the website at work.

Net wealth

* Goldman Sachs' cash injection values Facebook at $50bn – up from $33bn in August last year – making it one of a growing number of internet success stories. Other valuable web brands include Twitter, which in September 2009 was worth a healthy $1bn but now is valued at three times that amount; Amazon, which has soared from $30bn in July 2008 to $80bn today; and the daddy of them all, Google, which has seen a more modest rise of $8bn since November 2009, but which now has an overall value of $189bn. Unfortunately for entrepreneurs everywhere, not all web businesses are so sought after. Yahoo! executives turned down an unsolicited offer of $44bn for their web portal from Microsoft in 2008 but are now sitting on a business worth less than half that amount. The social networking site Bebo was bought for $850m by AOL in 2008, then reportedly sold for just $10m in June last year. But for the worst deal of all look no further than Yahoo! (again) – it bought web hosting service Geocities for $3.5bn in 1999 and 10 years later closed it down.