Goldman Sachs makes friends with Facebook in $450m deal

Site valued at $50bn as bank invests its own cash - and tellsrichest clients to do the same

Status update: the world's most popular social networking websitehas been caught in the suckers of an institution otherwise known asthe Vampire Squid. From now on, Facebook will be brought to you inassociation with Goldman Sachs.

The investment bank kicked off 2011 by taking a $450m (291m)stake in Silicon Valley's brightest star, in an opaque deal thatvalues the firm at around $50bn and doubles the net worth of MarkZuckerberg, who owns just over a quarter of the firm, to the giddysum of $14bn.

Goldman's cash gives Facebook the ability to carry on growing atits current exponential rate - hiring expensive employees,developing new products and buying smaller start-ups - withouthaving to jump through regulatory hoops which would accompany atraditional stock market flotation.

A Russian investment house, Digital Sky Technologies, has alsoput in $50m as part of the same agreement, according to The New YorkTimes, which broke news of the deal. The money also means that someof Facebook's earlier employees can cash in all or part of theirstakes in the company.

It's bad news, however, for normal investors hoping to secure aslice of the extremely fashionable pie. They will have to wait for aflotation, which is not expected to come until 2012 and about whichMr Zuckerberg said in November, "don't hold your breath".

Until then, some of the few people able to join the party are"high net worth" clients of Goldman Sachs. They will be allowed totake an additional $1.5bn in the firm, also at the $50bn overallvaluation, through "a special purpose vehicle" which the investmentbank will control and manage.

The US Securities and Exchange Commission (SEC) last weekannounced that it was launching an investigation into the privatemarket for shares in companies such as Facebook, Twitter and Zynga,the online gaming firm.

Although none of the firms are yet publicly traded - so are notrequired, for example, to publish their profit and loss accounts -electronic trading platforms are being widely used to connect eagerbuyers and willing sellers (such as company employees) of stock thathas already been privately issued.

There are fears that this practice has created an opaque andunregulated market prone to huge bubbles - the paper value ofFacebook more than doubled in 2010 - but is devoid of properliquidity or investor information. If commercial circumstanceschange, investors could be left with catastrophic losses.

Among other things, the SEC plans to look at whether privately-traded tech firms are properly using a loophole in the law to bypasspublic disclosure rules. For example, US law requires companies withmore than 499 investors to publish their financial results.

Facebook says it does not need to comply with this rule, since ithas less than the magic number of 499 stakeholders. But to get awaywith this claim, it will have to count funds such as Goldman's"special purpose vehicle", which is likely to pool cash frompossibly thousands of people, as a single investor.

The other intriguing player in Facebook's future is the Russianinvestment firm Digital Sky Technologies, owned by Alisher Usmanov,the Uzbek billionaire with a significant stake in Arsenal footballclub. Digital Sky bought 2 per cent of Facebook for $200m in 2009,and has since increased its stake to around 10 per cent by buyingshares from employees. It has already made a profit of around 500per cent after a year in which Facebook overtook Google to becomeAmerica's most visited website, with 8.9 per cent of the country'sinternet traffic, and Mark Zuckerberg was named Time magazine's"person of the year".

Ironically, all the major players are hiding behind a veil ofsecrecy which seems at odds with Facebook's spirit of openness:neither Goldman, nor Digital Sky, nor Facebook itself would commenton the new deal yesterday. And Goldman Sachs still blocks its stafffrom accessing the website at work.

NET WEALTH

* Goldman Sachs' cash injection values Facebook at $50bn - upfrom $33bn in August last year - making it one of a growing numberof internet success stories. Other valuable web brands includeTwitter, which in September 2009 was worth a healthy $1bn but now isvalued at three times that amount; Amazon, which has soared from$30bn in July 2008 to $80bn today; and the daddy of them all,Google, which has seen a more modest rise of $8bn since November2009, but which now has an overall value of $189bn. Unfortunatelyfor dot.com entrepreneurs everywhere, not all web businesses are sosought after. Yahoo! executives turned down an unsolicited offer of$44bn for their web portal from Microsoft in 2008 but are nowsitting on a business worth less than half that amount. The socialnetworking site Bebo was bought for $850m by AOL in 2008, thenreportedly sold for just $10m in June last year. But for the worstdeal of all look no further than Yahoo! (again) - it bought webhosting service Geocities for $3.5bn in 1999 and 10 years laterclosed it down.