The Goldman-Facebook Deal's Troubling Fine Print
By Eric Jackson This means that Goldman expects to win the underwriting business for a $100 billion IPO. Typically, banks get 7% in fees for an IPO. You know that Facebook won't pay full price, though, given the size of the IPO. So let's knock the bankers' fees down to 4%.
RealMoney Contributor
1/6/2011 4:59 PM EST
Click here for more stories by Eric Jackson
This week's biggest news by far was the announcement that Goldman Sachs (GS - commentary - Trade Now) was putting $450 million of the firm's capital into Facebook. The part of the deal that sent tongues wagging was the $50 billion valuation that Goldman placed on Facebook. However, there's a smaller aspect of the deal that's getting increased scrutiny, which is letting Goldman's high-net-worth clients put in some of their money too.
There are many reasons for Goldman to have done this deal with Facebook, even at this rich valuation. First, Goldman has put itself in the pole position to win the Facebook IPO. This is Goldman Sachs, so you know it wants to get a return on its $450 million investment -- and not a 10% return either. I doubt Goldman would do it unless it expected to double its money.
Companies going public typically issue 15 – 30% of the company’s shares to the public. So, at 4% fees on 30% of a $100 billion company, Goldman would get a $1.2 billion payday in fees.
You think I'm being unrealistic thinking that Facebook would be worth $100 billion by 2012? OK. Let's say the company stays valued at $50 billion. So Goldman has made nothing as a firm on its $450 million investment. Too bad, so sad. In that worst-case scenario it will have to comfort itself with $600 million in fees from the IPO underwriting.
Heads Goldman wins, Tails Goldman wins.
I'm surprised no one has discussed this point. It's a no-brainer investment for Goldman. And we haven't even talked about the goodwill that Goldman will bring to its best institutional and high-net-worth clients when they start distributing the pre-IPO Facebook shares like Santa Claus.
Sphere: Related Content
