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Goldman Sachs, Digital Sky ‘Friend’ Facebook With Big Investment

January 3, 2011 at 12:00 AM EDT
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According to The New York Times, a new investment deal makes Facebook more valuable than eBay or Starbucks -- a new landmark for a site now used by half a billion people globally. Ray Suarez talks to Andrew Ross Sorkin, who cowrote the Times story, about what this latest valuation means for the social networking giant.
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JUDY WOODRUFF: The business world was abuzz today over a new investment deal that values the social media company Facebook at a whopping $50 billion.

Ray Suarez has the story.

RAY SUAREZ: If its backers are right, the popular social networking site Facebook is now worth more than companies like eBay, Time Warner and Starbucks.

According to today’s New York Times, the investment firm Goldman Sachs and a Russian company called Digital Sky Technologies invested $500 million in Facebook in a deal that values the company at $50 billion. Facebook lets users create personal Web profiles, as well as connect to and share information with friends. It is used by about half-a-billion people around the world. And, last year, it surpassed Google as the most visited Web site in the U.S.

Here to tell us more is Andrew Ross Sorkin, who co-wrote the story for The Times. And, Andrew, what does Goldman see in Facebook that makes it worth that much money?

ANDREW ROSS SORKIN, Financial Columnist and Reporter, The New York Times: Well, I think that there’s two stories here. One is this valuation of Facebook at $50 billion. And you say, why — why $50 billion? That sounds like a lot of money. On a relative basis to something like a Google, which, as you just said, Facebook has just surpassed in terms of page use, Google is worth close to $200 billion.

And they’re all trying to get at the advertising market, targeted advertising, being able to really be able to advertise directly to you by knowing as much information about you. And that’s what Facebook, perhaps even more so than Google, is able to bring the advertiser. The second component…

RAY SUAREZ: Go ahead. I’m sorry. Go ahead.

ANDREW ROSS SORKIN: No.

Well, the second big headline here, though, is Goldman Sachs. Why is Goldman Sachs, a Wall Street investment firm, doing this? And it is as much a financial investment for them as it is an opportunity to get on the ground floor of a possible Facebook IPO in the future. This is a private sale early. It’s an opportunity for them to give their high net worth clients access to these coveted shares. And so there’s all sorts of fee streams throughout that will make this deal perhaps profitable for Goldman Sachs, even if Facebook ultimately isn’t as profitable as people think.

RAY SUAREZ: Well, when I saw the story this morning, your story, I logged on Facebook. And the first three items in my queue were my kid brother’s new short haircut, a picture of my son at a college convention, and a journalist friend shooting me a copy of your story.

And I thought, well, how do you monetize that kind of person-to- person contact? I could see some value in it, but I don’t know if I was making anybody any money.

ANDREW ROSS SORKIN: Well, I will tell you what’s happening, Ray, which is, on the side, on the corner of your Web screen on Facebook, just like on Google, there are ads that are targeted to you specifically. And they might have your alma mater. They might have information from your e-mails that they’re picking up saying, well, if he’s interested in that or he — it’s an e-mail about a trip you’re planning, it might have airfares.

And so what’s happening is a totally new model of advertising that’s being able to really come at you directly and be customized towards you, hoping that you’re more likely to click on that than a generic ad that is sent across the Web or, frankly, television or the radio.

RAY SUAREZ: You mentioned a future possible IPO for Facebook, but, right now, Facebook shares don’t circulate freely. But is there another market, another way of buying into this company, now that Goldman Sachs owns this stake?

ANDREW ROSS SORKIN: Well, even prior to Goldman Sachs owning the stake, oddly enough, there was a hot secondary market, almost a shadow market for Facebook shares. Facebook employees and early investors in Facebook have been holding on to these shares since the company’s creation. And there has become these secondary exchanges, where people are actually trading in these shares in advance of a potential IPO.

The idea that Goldman Sachs is now going to not only invest $450 million, but, in addition, they’re going to raise an additional $1.5 billion from their own investors, means there is going to be an even larger market out there for these shares. However, I should note that, because of this secondary market, the SEC, which historically has regulated the public market, is now looking at this space. And I think they’re very curious to understand whether private companies are usurping the rules around public disclosures. The rules that the SEC has is that, if you have more than 499 shareholders, once you get to 500 shareholders, your 500th shareholder, means that you have to start making public disclosures about your finances. Thus far, Facebook has not done so.

RAY SUAREZ: Well, following up on what you just said, what can Goldman do with its stake in Facebook?

ANDREW ROSS SORKIN: Well, it’s very interesting.

They can’t do much, except wait for the IPO. But what is so interesting about this special-purpose vehicle which Goldman is creating is that, effectively, they may ultimately have several hundred investors in this vehicle, but they will only count — or what they’re trying to do is make it count as one investor, so that they won’t go beyond the 500 investors that, technically, the SEC has the rule for.

So, the real question is actually whether the SEC is going to look favorably upon this or not. The SEC is not only looking at Facebook before this investment but they’re also looking at Twitter investments, and Twitter — investments in LinkedIn, investments in a company called Zynga. There’s really become this hot secondary market for all sorts of pre-IPO Internet companies.

RAY SUAREZ: Earlier in the just past decade, Rupert Murdoch bought MySpace for what was then considered a phenomenal amount of money.

ANDREW ROSS SORKIN: Right.

RAY SUAREZ: And it was given a very gaudy valuation at the time. And I don’t think anybody thinks it’s worth that today.

ANDREW ROSS SORKIN: Right.

RAY SUAREZ: How do we know this isn’t just another MySpace?

ANDREW ROSS SORKIN: You know, it may be another MySpace. I should tell you Goldman Sachs, whatever you think of their brand and credibility, they bought into a company called Webvan. I don’t know if you remember that from the late ’90s. It also doesn’t exist today.

So, not all their investments work out. But I do think that Facebook has more value than — than some people are ascribing to it. They are a profitable company. And they’re making $2 billion, with a B, in revenue. And, more importantly, their tentacles are everywhere. Because they have an — almost an e-mail service, and because they’re so ubiquitous, and people are on so tied into it, there’s a real question actually as to whether a competitor, you know, two guys in a garage, can actually start something new that somehow usurps Facebook all over again.

RAY SUAREZ: Well, if Goldman Sachs is right about what Facebook is worth, Mark Zuckerberg, its founder, is worth $14 billion.

Andrew Ross Sorkin, thanks for joining us.

ANDREW ROSS SORKIN: Thank you, Ray.