Musings On Markets

500 million investment in Facebook for about 1% of the business. 50 billion for Facebook, lots that are making the rounds in information stories over the last few days. You will find three questions that emerge from this news story: (a) With private businesses, can you extrapolate from a single transaction total a standard value? Why would a company worthy of billions choose to remain private, when it obviously has the option to go public?

Can you extrapolate from an individual transaction amount to a standard value? Sure, as long as the transaction can be an arm’s length one and all you are getting in return for your investment is a share of the business’s equity. If, as is common, there are part benefits or part costs that choose the deal, extrapolation shall yield a deceptive estimate of value. In the entire case of the Goldman transaction, there are plenty of reasons to be skeptical. 1.5 billion from its clients to invest in Facebook.

While this may seem to be a favor that Goldman does for Facebook, the truth is that Facebook is a hot company to purchase and this allows eager investors an exclusive entree in to the company. A front side chair for the Facebook IPO: If sooner or later in time, Facebook decides to visit public, Goldman may very well be the lead underwriter and enjoy a big talk about of the percentage.

Private wealth management services to Facebook’s potential billionaires and millionaires: When Facebook will go public, Mark Zuckerberg and lots of other professionals will have the capacity to market their shares on the market. 500 million that Goldman paid in this transaction. Exactly how much depends on the probability of an IPO and the charge framework for the transaction.

One more notice of extreme caution. Why would a company worth billions choose to remain private, when it obviously gets the option to look general public? Facebook’s reluctance to visit public may appear surprising. After all, the conventional intelligence is definitely that companies like Facebook should get a far more beneficial response from offering stocks in the public market place than from private offerings to business capitalists and large traders.

Extending the tease: Looking at the favorable promotion that Facebook offers in the last week from the Goldman deal, it generally does not look like waiting around to go public is hurting Facebook, at least for the moment. In fact, it may be making Facebook a far more desirable investment to the people who cannot spend money on it right now. While I don’t believe that this is a big factor for Facebook, there are a few companies that choose to remain private because they are afraid of uncovering proprietary information about their products/services to the general market. Instead, they can provide the information, with sufficient limitations on disclosure, to a few wealthy investors who may then invest in the business.

Founder idiosyncracies: If the creator and bulk stockholder in a company choose that he does not want the business to go open public, the business won’t go open public. Regarding Facebook, it is entirely possible that Mark Zuckerberg has decided that he does not want to take the business public and he will not seem the type of one who can be dissuaded easily. Regulatory and information disclosure concerns: From Sarbanes-Oxley to SEC limitations, public companies are constrained with techniques that private businesses are not. No valuation scrutiny: Like a publicly exchanged company, no matter how reputable it might be, the marketplace valuation shall be questioned by skeptical investors.

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Scaling value to profits or reserve value, investors will argue that the business is overpriced, relative to others on the market. Facebook reaches have the best of both global worlds, again at least for the moment. We get glimpses of its immense value, each right time a transaction is made, and no real way to examine if the value is practical, since we do not have access to a lot of the information we are in need of.

In summary, Facebook is within a unique position. It gets the profile to improve capital from wealthy investors are favorable terms and is getting lots of the benefits of being truly a publicly traded company without any of the costs. Absolutely. When there is bad information (or even rumored bad news) about the business and some or perhaps a few traders have trouble exiting the business, the estimated value could meltdown quickly.

Musings On Markets
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