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The New “It” Couple: Goldman Sachs and Facebook.

January 6, 2011

Facebook’s friend list keeps growing and by some top-notch influential players in the investment world. Facebook has been making deals with private investment companies since 2004, steadily increasing its estimated worth, with its most recent deal to be with Goldman Sachs. Details about this emerging deal surfaced this weekend and is set to close out by tonight. Here is the 411 on the new Goldman Sachs/Facebook friendship. Goldman Sachs, along with one of their top investors DST, will jointly invest $500 million up to $2 billion into Facebook (which is actually only less than 1 percent of the whole company). It works like this, Goldman Sachs is taking a direct stake in Facebook by allowing their wealthy investors to invest in Facebook along with them.

According to an article I read in The New York Times, “Goldman is charging stiff fees for the privilege 4 percent placement fee and a 5 percent cut of the investment’s profits (according to two people with direct knowledge of the deal).” That’s on top of the $2 million minimum investment fee and investors are prohibited from selling any shares until 2013. The deadline for investors was moved up to today, from tomorrow, as the interest has been overwhelming and both Facebook and Goldman Sachs are eager to get this show on the road. Goldman also stands to make millions on the investment banking fees alone just from this deal. While this may not seem like a big deal, lets keep in mind that over the past year alone investment banking fees has risen over 9%. Does this seem right to you? Considering in the fall of 2008, Goldman Sachs received a $12.9 billion (yes i said BILLION) payout from the government’s bailout of AIG. Goldman Sachs was responsible for, and has openly admitted to, misleading over 32 investors with the worthless risky securities it held in AIG and only fined $550 million for it. So they defrauded 32 entities, many overseas, and after all is said and done they still have billion to show for it. Only seems fair right? (insert sarcasm here).

Now, after all the dust has settled, Goldman Sachs is given the chance to increase their banking fees and charge exorbitant placement fees for potential investors. They are also the leading candidate to reap the benefits of Facebook’s IPO (Initial Public Offering), whenever that day should arrive. Goldman Sachs, being a key investor in Google (a Facebook frenemy), profited heavily from their IPO in 2004 (which is rumored to have been pushed into an early IPO by Goldman due to high pressure from major investors). With a staple name like Goldman Sachs and their previous experience with Google, Facebook could be facing an IPO much earlier than anticipated. Perhaps something Mark Zuckerberg needs to keep in mind. It has been said that Facebook wants to remain below the 500 shareholder threshold that would otherwise force it to publicly disclose its financial data. This deal with Goldman Sachs is formulated in part to bypass those rules. You mean another deal Goldman Sachs is handling that is meant to cut corners and profit themselves? Shocker.

This new deal is raising eyebrows once again at the SEC (The Securities and Exchange Commission) who is thinking about changing some regulations to prevent future loopholes.  Hopefully the SEC can make some landmark changes in their regulations so companies that cheat and mislead their investors won’t be allowed to fall through loopholes and make billions upon billions at the expense of the tax payers.

We would love to hear your thoughts on this at GAI (www.gunwel.com). Give us a call at 212-979-6830 or stop by for a visit. See you soon!!

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