Goldman Flooded With Facebook Orders

By GREGORY ZUCKERMAN, LIZ RAPPAPORT and AARON LUCCHETTI
The Wall Street Journal
January 6, 2011

Inundated with demand, Goldman Sachs Group Inc. plans to stop taking orders for shares of Facebook Inc. on Thursday, and has told some would-be investors to expect just a small fraction of the shares they requested, according to people familiar with the situation.

The interest, amounting to several billion dollars in an equity offering likely to be no more than $1.5 billion, is a sign of investor fascination with the closely held social-networking company despite a dearth of available information about its operations and financial condition.

Goldman has provided some potential investors with little more than a snapshot of Facebook’s online traffic, advertisements and other basic measurements, with no disclosure of the Palo Alto, Calif., company’s bottom line, people familiar with the matter said.

Some additional details about Facebook’s performance emerged late Wednesday as part of an offering document. According to people familiar with the document, Facebook had net income of $200 million in 2009 on revenue of $777 million. Figures for 2010 weren’t disclosed, but analysts have said the company’s revenue last year could be as much as $2 billion, fueled by advertising growth.

A Facebook spokesman declined to comment.

Wealthy Goldman clients have been jockeying for a piece of Facebook since the deal was struck last weekend, a situation reminiscent of the technology bubble of the late 1990s when online-grocery seller Webvan Group Inc. and other upstarts with far shorter track records than Facebook sold stakes to investors.

Goldman initially was expected to solicit investors at least until the end of this week. The Wall Street bank mostly is approaching individual Goldman clients, though an unknown number of hedge funds, private-equity firms and other institutions that make trades or do other business with Goldman also have been asked if they would be interested in buying a piece of Facebook, according to people who have been contacted by Goldman. Goldman declined to comment. Firms where officials were called about a potential Facebook investment include Blackstone Group LP and Fortress Investment Group LLC, according to people familiar with the matter.

Such investors must promise to invest at least $2 million and not sell shares until 2013, including on secondary markets that allow investors to buy or sell stakes held in private companies.

Hundreds of Goldman partners also can get in on the deal, and aren’t subject to the $2 million minimum investment.

Only about 470 of Goldman’s roughly 35,000 employees have the title of partner, according to a person familiar with the number, which isn’t publicly disclosed by the company.

The deal includes a $500 million investment by Goldman and Digital Sky Technologies of Russia. Goldman is likely to wind up owning roughly a 0.8% stake in Facebook, while DST would have slightly less than 10%. Last year, DST invested $200 million in Facebook.

Even though some would-be investors declined a chance to buy Facebook shares, the deal is a coup for Goldman’s investment-banking unit. The operation was the heart of the firm for decades, but has been overshadowed the past several years by Goldman’s fixed-income trading business, a profit juggernaut even during much of the financial crisis. But trading results have suffered recently.

In some ways, the Facebook deal represents all sides of the classic Goldman business model: Take a stake in a fast-expanding company, advise it on capital raising, help the company rake in cash from investors, and eventually sell a stake to outside investors through an initial public offering.

Goldman will collect from new Facebook investors upfront fees of 4%, plus 5% of any gains, according to people familiar with the matter. Analysts said the securities firm also is likely to get a private-placement fee for arranging the deal. Such fees typically range from roughly 2% to more than 4%.

Goldman would get another windfall if Facebook eventually goes public and Goldman manages the IPO.

IPOs are one of the most lucrative types of deals on Wall Street, generating fees of about 4% to 7% of the total offering. Facebook’s potential IPO fees could be smaller because the deal is expected to be unusually large. Investment banks that took Google Inc. public in 2004 earned 3%.

More revenue could come from managing assets of Facebook executives such as President and Chief Executive Mark Zuckerberg, who owns about 25% of the company. It isn’t clear if Mr. Zuckerberg is a wealth-management client of Goldman.

Some current and former Wall Street rivals said being on so many sides of the Facebook deal could expose Goldman to conflict-of-interest accusations.

The company has been trying to revamp its image after settling a civil-fraud lawsuit with the Securities and Exchange Commission last July for $550 million.

Goldman is expected to release later this month the results of an internal review that included potential conflicts of interest at the firm, its financial disclosures and dealings with clients.

“This is one more example to those in the rest of the country that are one step removed from Broad and Wall [streets] that the advantage for those in the financial markets goes to those on the inside,â€