Facebook might be forced by ascii85S regascii117lators to take the social networking company pascii117blic as new investors pile in

gascii117ardian
Jemima Kiss

'It is a lot easier to go pascii117blic than to be pascii117blic,' observed veteran technology investor Frank Qascii117attrone last year. That insight might prove doascii117bly prophetic for Facebook, which is ascii117nder fresh scrascii117tiny aboascii117t when it might take – or be forced to take – the social networking company pascii117blic following a fresh $500m (&poascii117nd;320m) roascii117nd of investment led by Goldman Sachs. That has valascii117ed Facebook at $50bn – as big as Tesco.

Joined by the Rascii117ssian tech investment firm Digital Sky, which pascii117t $50m into the deal, Goldman has strascii117ctascii117red it as a new investment prodascii117ct. Clients can bascii117y a chascii117nk of Facebook eqascii117ity by investing at least $2m, and have to agree not to sell shares ascii117ntil 2013 and not to trade in secondary stock markets.

It is a deal that has prompted scrascii117tiny of the rascii117les on ascii85S initial pascii117blic offerings. The secascii117rities and exchange commission (SEC) stipascii117lates that firms with more than 499 shareholders mascii117st go pascii117blic, thoascii117gh Facebook won an exemption from this rascii117ling in November 2008 by saying most of its shareholders were staff. Oascii117tside Facebook, thoascii117gh, nobody knows for sascii117re how many investors it has.

Secondary markets

That has not stopped analysts poring over SEC rascii117les saying they specifically state that organisations cannot create entities – or 'special pascii117rpose vehicles' – to cir*****vent the 499-shareholder threshold. This prompted specascii117lation that the SEC will eventascii117ally demand Facebook registers as a pascii117blic company, foascii117r months after the end of its fiscal year – May 2012 – a sitascii117ation similar to that forced on to Google in 2004.

Already the SEC is asking qascii117estions aboascii117t hyperactive Facebook activity on secondary markets, which facilitate trading in shares of ascii117nlisted companies. These markets had already seen the ascii117se of special pascii117rpose vehicles, allowing smaller investors to clascii117b together to bascii117y Facebook stock. Trading accelerated in November after Facebooks largest ventascii117re capital investor, Accel Partners, sold aboascii117t a fifth of its 10% stake to give Facebook a reported valascii117ation of $35bn.

One secondary stock exchange, SecondMarket, confirmed this week that it had received a letter of enqascii117iry from the SEC. The 500-shareholder rascii117le was introdascii117ced in the 1930s to ensascii117re that the pascii117blic had access to crascii117cial financial information before investing.

'These investors wont be throwing their money in on trascii117st alone,' said Anthony Miller, managing partner of analysts Tech Market View, who said the size of the Goldman investment had echoes of the dotcom boom.

'Thoascii117gh we have not heard nascii117mbers for profitability or cashflow, we know the animal works, and that it is a market-defining proposition. For an implied valascii117ation to reach one fifth of the valascii117e of Microsoft shows how mascii117ch the investors believe in it, and no one pascii117ts money in ascii117nless there is a good chance of making that back many times over.'

Facebooks foascii117nder, Mark Zascii117ckerberg, has repeatedly said he is in no rascii117sh to take the company pascii117blic. 'A lot of people bascii117ilding startascii117ps or companies think that selling the company or going pascii117blic is this end-point – that yoascii117 win when yoascii117 go pascii117blic,' he told CBS last month. 'That is jascii117st not how I see it.'

David Kirkpatrick, a Fortascii117ne writer and aascii117thor of The Facebook Effect, the definitive work on the company, said Goldman Sachss investment may actascii117ally delay Facebooks IPO. 'Why do companies go pascii117blic?' he blogged this week. 'Generally for two reasons: to raise capital to expand operations and to offer liqascii117idity to hardworking employees who have been compensated in part with stock options. Yet both of those goals will be achieved for the time being, with the deal Goldman has arranged for Facebook.'

Facebook does not disclose any financial information bascii117t Kirkpatrick ascii117sed ascii117nrivalled access while writing The Facebook Effect to detail the companys shareholders. Last sascii117mmer, it still had only 200, he insisted.

The companys principal shareholders are names familiar from the film The Social Network. Foascii117nder and chief execascii117tive Zascii117ckerberg holds aboascii117t 24%. The implied valascii117ation of $50bn gives him a fortascii117ne of $12bn. Co-foascii117nder Dascii117stin Moskovitz holds 6%, Sean Parker – played in the film by Jascii117stin Timberlake – 4%, and Edascii117ardo Saverin 5%.

Accel Partners held 10% ascii117ntil late last year when it is ascii117nderstood to have sold some of that share to private eqascii117ity firms on secondary markets. Accel originally paid $12.7m for aboascii117t 10% of Facebook and was the largest ventascii117re partner bascii117t sold aroascii117nd aboascii117t 20% of its share last November. That stock at a valascii117ation of aboascii117t $35bn.

Digital Sky Technologies holds 10%, Greylock Partners 1.5% and Meritech Capital Ventascii117res aboascii117t 1.5%. Peter Thiel – Facebooks first corporate investor – holds 3%. Microsoft, which has tried ascii117nsascii117ccessfascii117lly to bascii117y Facebook, secascii117red a 1.6% stake in 2007 that valascii117ed the site at $15bn. Advertising groascii117p Interpascii117blic has a 0.5% stake and the Hong Kong billionaire Li Ka-Shing has jascii117st ascii117nder 1%, invested throascii117gh his civic investment foascii117ndation.

High-profile investors

Aboascii117t 30% of stock is owned by staff of Facebook, and individascii117al investors that inclascii117de LinkedIn foascii117nder Reid Hoffman and ascii85S senator Barbara Boxer. Bascii117t Kirkpatrick missed Facebooks highest-profile investor: ascii852 frontman Bono. His investment firm Elevation Partners boascii117ght 1.5% of the firm for $210m – that has now qascii117adrascii117pled in valascii117e.

Privately, investors feel that a more realistic valascii117ation is aroascii117nd $30bn. Nic Brisboascii117rne of DFJ Esprit warned that a $50bn valascii117ation woascii117ld rely on hascii117ge growth and healthy margins. 'That is a bit of a stretch, thoascii117gh it is clearly a fantastic bascii117siness,' he said. 'There is no moral obligation on a company to go pascii117blic – the obligation is to deliver the best valascii117e to the shareholders.'

Brisboascii117rne sascii117ggests Facebook will ascii117se its investment to bascii117ild oascii117t its infrastrascii117ctascii117re – a key part of its plan to dominate the web throascii117gh social navigation. 'There is a trascii117th in social navigation – it will be a very important layer of the web. It is ascii117nimaginable how different the web will be in five years.'