(Reuters) - A group of Facebook shareholders is seeking to offload $1 billion worth of shares on the secondary market, a sale that would value the company at more than $70 billion, according to five sources with direct knowledge of the situation.
It would represent one of the largest transactions of Facebook shares to date and points to a growing wariness among early-stage investors and employees who fear Facebook's growth cannot keep pace with its market valuation.
The sellers have lowered their price after previously trying to offload shares at a price that valued the company at $90 billion, which would make Facebook more valuable than Time Warner Inc and News Corp combined. But buyers balked.
Sumeet Jain, partner at venture capital firm CMEA Capital, who has examined Facebook deals recently, and has taken a pass, says,
"At the current valuation where it is, it is really hard to justify the investment. It's hard to imagine it will turn into a $270 billion company in the next few years."
The current deal, which includes stock held by Facebook employees, is awaiting approval from top Facebook executives including Chief Executive Mark Zuckerberg and Chief Financial Officer David Ebersman, according to two sources.
Facebook declined to comment.
Investors, ranging from venture capital firms to rich individuals to investment banks, have scrambled to get a piece of the privately held company before its expected IPO next year.
Facebook raised $500 million from Goldman Sachs Group, and Russia's Digital Sky Technologies, for instance, giving it a market value of $50 billion. Weeks later, private equity firm General Atlantic piled into the company, valuing it at $65 billion, according to CNBC.
Tim Draper, the well known venture capital partner who founded Draper Fisher Jurvetson, told Reuters this month he recently looked at buying shares of Facebook deals, but passed because of an unattractive valuation.
One wealthy person, who has fielded calls for the past month involving Facebook pitches in the range of $200 million to $1 billion, and implied that the startup is valued at $90 billion, is also sitting on the sidelines. Says the unnamed individual,
"It's priced to perfection in the private marketplace. I don't like to own anything I can't sell right now."
Created in a Harvard University dorm room in 2004, Facebook rocketed from an online directory created for college students to the world's No. 1 social network with more than 500 million members worldwide.
The company's astounding growth and popularity have put some of the Internet's biggest guns on notice -- including Google Inc -- and have made it the darling of investors seeking to stake out claims in private companies before they go public.
Facebook, the world's No. 1 Internet social network, earned $355 million in net income in the first nine months of 2010 on revenue of $1.2 billion.
It is one of a handful of Internet companies including Twitter, Groupon and Zynga whose soaring valuations recall the heady days of the late 1990s.
It is questionable whether new investors would realize the exponential growth that early-stage investors got in Facebook, said Oppenheimer & Co managing director Stephen Todd Walker.
That's particularly true, he said, as the company faces more competition abroad from social networking sites like China's Renren Inc, which is expected to go public next week. Says Walker,
"For Facebook, the larger you get, the harder it is to have that explosive growth."
Nonetheless, an array of investors has piled into Facebook. Mutual fund giant T. Rowe Price recently disclosed that several of its funds owned stakes in Facebook, valuing the company at $25 per share, which implies a valuation of $50 billion.
Yet one hedge fund manager who passed on smaller Facebook deals recently said that, for him, the opportunity to get in on the action had passed. Says the hedge fund manager,
"By the time T. Rowe Price is investing you know it's too late."
COMMENTARY: If Facebook earned $355 million in net income during the first nine months of 2010, and if you extrapolate, this works out to about $473 million in net income for the full year. Facebook was valued at $50 billion, when Goldman Sachs and Digital Sky Technologies made their investments. This would mean a multiple of 105 times earnings. That's so ridiculous it is almost laughable. If Zuck and his CFO approve the mega $1 billion sale, the new valuation of $70 billion would mean a multiple of 147 times earnings. Now I am coughing up blood and jealous as hell.
I wholeheartedly agree that Facebook's days of exponential growth are over. In a blog post dated March 20, 2010, I calculated that Facebook's ad-supported revenue model had reached a critical inflection point around the middle of 2010. Facebook is no longer growing exponentially in number of users or ad revenues, and moving forward, growth will slow and eventually peak. I thought the partnership with Baidu to build a new social network site might put it back on a road of exponential growth, but according to rumors, the deal may fall through because of censorship issues. Even if that deal goes through, it will take Facebook at least until 2012 to launch the new site.
Facebook is working feverishly to add new revenue streams beyond commissions on Facebook Credits and advertising. I see no evidence that Facebook Places, its location-based check-in service is producing meaningful revenues. In a blog post April 22, 2011, Facebook announced a limited launch of Facebook Deals, a daily deals check-in service that would compete against Groupon and LivingSocial, Google Offers and other daily deal offerings. The problem will be execution and Facebook has to overcome learning curve issues, hire new staffers familiar with promotional offers, and expand its sales force rapidly in order to increase revenues. Several social media guru's are proclaiming this will be a golden goose egg for Facebook. For several reasons I tend to disagree, because it is too early to predict such things.
In a letter to its 50,000 wealthy investors dated January 14, 2011, SecondMarket, the private company stock brokerage firm for Facebook shares, indicated that the new per share price was $28.26 based its auction of January 12, 2011, and that it had traded a total of 2,721,265 Facebook shares. The last auction had set Facebook's valuation at $70 billion.
Until its recent launch of Facebook Deals, nothing else of any significance had occurred, so it's safe to say that the $70 billion is a good valuation, but in several blog posts, I have been fairly vocal about the lack of a quantitative business valuation that discounts future cash flows to take into account risk and uncertainty, rather than just basing everything on future potential. For a startup like Facebook, which has some of the lowest revenues per unique user when compared to other technology companies, the risk is much higher because advertising revenues are not predictable. Facebook investors have an infactuation with Facebook's bigness and buying is stock is spurred by a lot of hype, euphoria and whole lot of greed.
I have to admit I am amazed there are so many potential investors waiting in line to get their hands on a piece of Facebook. It would be a coup if anybody knew the exact details of the latest $1 billion sale. How many seller's are there in total and how many are Facebook staffers. I have this feeling that Facebook's per share price has peaked at $28.26, and maybe its a good time to get out, while the getting is good.
Courtesy of an article dated April 27, 2011 appearing in Reuters
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