Thursday, January 6, 2011

It's Good to be Goldman Sachs


Earlier this week I posted a note about the purchase of a small portion of Facebook by Goldman Sachs on behalf of some of its well-heeled clients.

I found the deal - which valued Facebook at $50 billion, or 25x its annual revenue - priced at wildly optimistic levels (although I am a big fan of social media).

Well, it turns out that Goldman Sachs Capital Partners felt the same way, at least according to this morning's New York Times (I have added the highlights):

Goldman Sachs Capital Partners — a group that manages and invests for pensions, sovereign wealth funds and other prominent clients — was given the initial opportunity to invest $450 million in Facebook, said the people, who were not authorized to speak publicly on the matter...

But the unit’s chief, Richard A. Friedman, a longtime Goldman partner, decided the Facebook deal was not suitable for his clients, in part owing to the high valuation and to a mismatch with his investment criteria. The $450 million investment values the Web company at $50 billion. After Goldman’s deal, some industry experts cautioned that Facebook’s growth would need to accelerate rapidly over the next couple of years to justify such a steep price — a risk with many brand-name technology upstarts.

A Goldman Unit Is Said to Have Rejected Facebook - NYTimes.com

But there's more. After rejecting the offering for itself, Goldman then turned around and placed it with their clients.

Why would they do this? Read on:

...In the Facebook deal, Goldman is investing $450 million, at an implied $50 billion valuation. Goldman clients, however, are paying a 4 percent placement fee and a 0.5 percent expense reserve fee for their shares, as well as giving up 5 percent of gains. That means Facebook would need to be worth closer to $60 billion before they make any money.

Beside those fees, Goldman is likely to earn additional money from ancillary business, with the biggest victory coming from an eventual initial public offering, perhaps as soon as 2012.

Given all that, Goldman could still make money even if Facebook’s value drops to $40 billion, according to analysts’ estimates.

Looking at the last sentence: Facebook could drop -20% in value and Goldman still makes money.

Wow.