Double Blind

They paid $240 million for a miniscule 1.6% minority stake in Facebook. This values the entire firm at about $15 billion (this is assuming they could buy the other 98.4% at the rate they paid for the first 1.6%).

This is a great deal for Facebook – although it is not public how the deal was structured (i.e. how much actual control they relinquished or how many obligations they picked up as a result of this investment), they have managed to sell a small chunk of the business for an enormous amount.

I know how Facebook can best implement the money: money market funds are trading at 3.8% for short term cash and you can be sure that 3.8% (about $9 million income a year) will be infinitely more than whatever Facebook could spend $240 million doing. There is no core competency they can expand out of their currency niche.

If I was a shareholder of Microsoft, I would be selling as fast as I can – if management is stupid enough to spend your cash like they just did here, then you can be sure they’ll blow the other 30 billion they have in the bank in short order.

I am extremely skeptical that Facebook could possibly live up to a $15 billion valuation – there are a lot of companies out there that trade significantly under $15 billion that you could buy which have stable, inflation-adjusted cash flows. For example, you could buy CP Rail for $10.5 billion today. They made $707 million over the past 12 months, after taxes. Facebook won’t get this close, ever.

This entry was posted on Wednesday, October 24th, 2007 and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.