Facebook closed their $1.5 billion private offering last week. Good for Facebook. Good for Goldman. Bad for US securities markets.
I’ve been discussing this and similar topics exclusively in my newsletter about finance and tech for the past three weeks. Join here before the price rises February 1.
The deal is done: Facebook completed their $1.5 billion private offering last Friday. Originally announced as a private investment of $500 billion from Goldman and Digital Sky Technologies and a special-purpose investment vehicle of $1.5 billion from private investors TBD, Facebook chose to limit the oversubscribed special-purpose investment vehicle to $1 billion.
Two weeks ago Groupon closed a $950 million investment round from a variety of prestigious venture capital firms after supposedly turning down a large acquisition offer from Google.
The numbers are huge for early-stage companies; the only larger early-stage equity financing was a $1 billion investment into Clearwire in 2006. But far more interesting than the numbers themselves are the implications. I’ve been talking about it a lot lately, but hear me out.
Consider: The Goldman Sachs Facebook Deal: Is This Business as Usual?
According to Blume, the route chosen by Facebook may simply have been the cheapest way to raise money for the time being. To raise a relatively small sum of $1.5 billion, it makes sense to target wealthy individuals because large institutions have too much money to bother with small opportunities. The special purpose vehicle, Blume says, offers a convenient way to appeal to wealthy individuals, though Goldman and Facebook are using it in an unusual way.
The cheapest way to raise money right now? According to SharesPost the private shares of Facebook are trading at an implied valuation of $76 billion. Is that cheap? Let’s think: what would a potential acquirer value Facebook at? What would a hedge fund value Facebook at? What would the public market value Facebook at?
Facebook and Groupon don’t need the money to grow; from what I’ve read these financings are more about providing liquidity to early employees and investors than about funding expansion. Cashing in. Diversifying. Taking chips off the table.
But Facebook and Groupon took two very different paths to liquidity. Groupon’s rationale and structure was more traditional; Groupon passed on an acquisition offer and decided to bring in outside investors, allowing Groupon’s managers to keep operating control but still get a bit of the liquidity.
Facebook’s path achieved the same thing, but the structure was nontraditional. It also might be a model for more high-flying tech companies that are 1) very large 2) still growing quickly and 3) relatively immature for public markets.
Sadly, this may indeed have been the best way for Facebook to take some chips off the table. Once you decide you want to take $1.5 billion off the table, there aren’t that many ways. Too large for venture capital. Too large for most corporate acquirers. Large enough for private equity funds, but Facebook’s business model doesn’t fit the typical private equity investment (very different balance sheet, much less opportunity for financial machinations). And in many ways Facebook is still a young, immature company and may not be right for the public market at the moment.
Goldman had to pull the Facebook offering from US investors because of potential issues with US securities laws; if these types of private offerings can’t be sold to US investors, are large foreign investors the best option for these fast-growing, large, immature companies?
And while that’s perfectly fine for Facebook, and a great opportunity for investment banks like Goldman, that’s not good for US securities markets or US investors. Why?
Whatever happens, one point is obvious: the securities market is ripe for innovation. If being a public company in the US is so onerous that this Facebook offering is the clearer, cheaper, easier path to liquidity, then the securities markets in the US are in deep trouble. Special purpose investment vehicles, shadow markets, regulatory flight: it’s derivatives redux. Investment banks are “earning” money by creating a new, non-public system that links up big money to big companies. It’s an economic deadweight loss, it’s a less-efficient market. It’s certainly not a system that US securities regulators want to create.
Until the SEC steps in, the opportunity is there for other companies to follow. Who will be next?
I’ve been discussing this and similar topics exclusively in my newsletter about finance and tech for the past three weeks. Join here before the price rises February 1.
Update Jan 27: Nice commentary by Felix Salmon, Is the era of the public company coming to an end?
