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Goldman Promotes Facebook in Shadow Stock Market: David Pauly

Can Facebook Inc., that monument to wasted time, really be worth $50 billion?

We’ll have to take Goldman Sachs Group Inc.’s word for it. There are no public audited numbers for Facebook to back up the bank’s estimate of the company’s value.

News has leaked out that Goldman, supposedly the smartest Wall Street firm, will buy $450 million of stock in closely held Facebook, with Digital Sky Technologies, which invests in start-ups and is partly owned by Goldman, purchasing another $50 million.

The anonymous folks who put out these numbers said the deal sets a value for Facebook equal to that of Boeing Co. and approaching that of Home Depot Inc.

Goldman clearly is capitalizing on Wall Street’s latest diversion: a semi-public stock market for private companies.

Several firms now offer shares of closely held companies or offer estimates of their value, or both.

Featured in this new market are Facebook, where users share private information and photos among themselves; Twitter Inc., where you can follow your favorite celebrities as they desecrate the language; and Groupon Inc., an electronic coupon-clipper.

All this fuss fires up the market for initial public offerings of these companies well in advance of any actual sales.

Shadow Boxing

Putting a sky-high but hard to verify value on Facebook will likely boost the value of the shares Goldman is buying even higher on the shadow market and touch off extraordinary gains when Facebook’s 26-year-old chief Mark Zuckerberg finally decides to do an IPO. Late last week, Facebook said it would start reporting financial information in April 2012, a prelude to going public.

There’s another lucrative piece of the current deal for Goldman Sachs. It plans to sell an additional $1.5 billion in Facebook shares to its partners and wealthy clients.

Goldman will take a 4 percent placement fee for selling the shares, 5 percent of any gain in the stock and an annual servicing fee, according to two clients who have been offered shares.

Goldman’s investment in Facebook also should give the firm an inside track as the underwriter whenever the social networking company goes public.

A successful Facebook IPO is almost certain. Its Internet site got more hits in the January-November period last year than Google Inc.’s main site, according to New York-based tracker Experian Hitwise.

Money for Schools

Facebook says it has more than 500 million users. The company last week said that in the first nine months of 2010 it earned $355 million on sales of $1.2 billion. Founder Zuckerberg has become a celebrity, recently giving $100 million to the schools in Newark, New Jersey.

While Facebook looks more like a Google, which went public in 2004 and has climbed since, it’s being insanely overvalued as were dot-com disasters like EToys Inc. and Webvan Group Inc.

If you believe the company is worth $50 billion, take another leap. Using Facebook’s numbers from last week -- the best we have in the absence of complete financial reporting -- we might guess it made about $500 million for the year. That would mean its shadow market value was about 100 times its earnings. Google’s price-earnings ratio is 25.

Investors with short memories will pay whatever the shadow market and Goldman Sachs, the prospective underwriter, say they should.

Back in 2000, Cisco Systems Inc., then already the dominant company in computer network gear, had a P/E approaching 200. It’s now 15.

There’s another even more down-to-earth problem for the company. Facebook is now seen by analysts as a threat to Google as a gatherer of ad revenue. Who’s to say a few years from now another startup won’t pose a similar threat to Facebook?

(David Pauly is a columnist for Bloomberg News. Opinions expressed are his.)

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