Goldman to Cash Out $1 Billion of Facebook Holding in IPO

Goldman Sachs Group Inc. and funds managed by the firm raised $1.09 billion selling stock in Facebook Inc.’s initial public offering, cashing out almost half their stake in the social network.

The investment bank and its funds offered 28.7 million of the 65.9 million shares they own at $38 apiece, the top of the price range. Goldman Sachs sold 6.18 million of its own holdings, raising $235 million. The number of shares being offered by Goldman Sachs was included in a filing yesterday by Menlo Park, California-based Facebook.

The investment gain helps validate Goldman Sachs Chief Executive Officer Lloyd C. Blankfein’s business model and a January 2011 transaction that threatened to undermine efforts to improve his New York-based company’s reputation after it settled fraud claims a year earlier. U.S. regulators are drafting rules to prevent banks that receive federal backing from making risky bets with their own money.

“What risks should government-insured banks be taking? What if, hypothetically, Facebook had imploded?” asked Benjamin B. Wallace, an analyst at Westborough, Massachusetts-based Grimes & Co., which manages about $1 billion and doesn’t hold Goldman Sachs shares. “This is what happens when it works out.”

Goldman Sachs and its funds could sell 4.3 million more shares -- bringing the total raised to as much as $1.25 billion at the $38 price -- if the IPO’s underwriters decide there’s enough demand, according to Facebook’s filing. If that so-called greenshoe option is exercised, the investment bank and its funds will have cut their holdings 50 percent. Underwriters include Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs.

Group Effort

Goldman Sachs created a special-purpose vehicle to bundle the holdings under one name and sell the stock to wealthy clients. That kept it from running afoul of securities rules mandating that companies with at least 500 investors meet U.S. Securities and Exchange Commission reporting requirements. Jon Stewart, discussing the deal on Comedy Central’s “The Daily Show,” joked at the time, “Oh Goldman, is there any regulation’s intent you can’t subvert?”

A document for investors disclosed that Goldman Sachs might sell or hedge its stake without warning clients, underscoring potential conflicts in the firm’s business model of investing its own money as well as advising customers. The bank eventually said it canceled an offering of Facebook shares to U.S. investors amid concern that “intense media attention” may violate rules limiting marketing of private securities. Only offshore clients could participate in the deal.

Balancing Act

“Investing for clients, that’s certainly something they should be doing,” Wallace said about Goldman Sachs. “If, instead of investing proprietary money you pool investor money and manage that, there’s still an opportunity” for Goldman Sachs, he said.

The IPO, the largest by a technology company, values Facebook at more than $104 billion. That’s more than double the $50 billion value at which Goldman Sachs offered $1 billion of stock to non-U.S. clients in January 2011. The firm and the Goldman Sachs Investment Partners hedge fund run by Raanan A. Agus bought $450 million of Facebook stock.

A Bloomberg poll in late January 2011 found that 69 percent of global investors, traders and analysts surveyed thought the $50 billion valuation was too high.

What Goldman Gets

Goldman Sachs, the fifth-largest U.S. bank by assets, sold 6.18 million of the 14.2 million shares it owns for its own account, according to Facebook’s filing. The sale price values the firm’s total investment at $540 million, of which Goldman Sachs is cashing in $235 million in the IPO. If the greenshoe is exercised at $38, Goldman Sachs will raise an additional $35 million. That would cut the size of its holding to 7.1 million shares, valued at $270 million.

The gain on Goldman Sachs’s Facebook stake will be recognized in second-quarter results, helping to mitigate “weakness in investment banking and trading revenue,” Edward Najarian, an analyst at International Strategy & Investment Group Inc., wrote in a research note this week. He cut his second-quarter earnings per share estimate for Goldman Sachs to $2 from $2.60.

GSIP, the fund run by Agus, sold 1.57 million of the 3.61 million Facebook shares it holds in two investment pools, according to the filing. The IPO helped GSIP raise $59.6 million and a greenshoe at the same price would add $8.9 million, leaving GSIP with 1.8 million shares valued at $69 million.

Goldman Sachs’s non-U.S. clients, whose Facebook shares are held in a Cayman Islands-based investment pool called FBDC Investors Offshore Holdings LP, sold 20.9 million shares for $795 million. A greenshoe at the same price would raise another $119 million and leave the investor pool with 24.1 million shares worth $914 million at $38 a share.

Michael DuVally, a Goldman Sachs spokesman, declined to comment on the share sales.