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Facebook Value 'Plummets' to $70 Billion

The latest news on Facebook puts the company's value at $70 billion. What a crying shame. Just last week Facebook was worth $84 billion. Surely some horrible disaster must have befallen the world's greatest social networking site to destroy $14 billion in market cap seemingly overnight?


Facebook, remember, is not a publicly traded company -- yet. True, Facebook is the most highly anticipated IPO at least since Google (GOOG). (Although the recent debuts of LinkedIn (LNKD) and Pandora (P) were pretty sexed up, too.) And certainly on an emotional level it feels like the most important IPO of all time. (There was no Twitter or Facebook to amp up the excitement back when Google debuted, for one thing; and Facebook is an intimate part of people's lives in a way a search engine never could be.)

But the presumed IPO is just that: presumed. Facebook says it intends to go public, but it hasn't actually filed to go public. There's no date set. There isn't even any ink to dry on the documents because they haven't been drawn up yet.

So where do these figures that Facebook is a $70 billion or $80 billion or even $100 billion company come from? Extrapolation. They are implied valuations based on small transactions in privately held Facebook shares bought and sold between private parties or on so-called secondary markets. And there is a huge world of difference between setting the price of something in a small, private, illiquid market and a big, public, liquid market. Don't believe me? Just look at what happened to the global financial system a few years back and its experience with CDOs, credit default swaps and other illiquid, privately traded assets.

But back to Facebook. On Monday we learned that GSV Capital (GSVC), an investment firm focused on private companies, acquired 225,000 Facebook shares at $29.28 per share. Multiply $29.28 a share by the number of total private Facebook shares out there and you get a company with a market cap of about $70 billion.

Whoopee. Except that the whole exercise is an extrapolation based on what one investment firm was willing to pay for Facebook shares and -- just as important -- what the other side of the private transaction was willing to accept for those shares. That isn't exactly what you'd call a liquid market -- and it is a rule that illiquid markets are far less efficient at price discovery (setting essentially fair prices) than liquid ones.

Which brings us to this: Less than a week ago an auction of Facebook stock on SharesPost, a secondary market, closed at $35, giving the company an implied market value of $84 billion.

So, based on these "trades," boom: Facebook went to $70 billion from $84 billion in less than a week. Even funnier, about a week before that SharesPost auction went down sources were telling CNBC that Facebook's eventual IPO could put the company's value at $100 billion.

So what is Facebook actually "worth?" First, let's have a look at what that question really means. Since the first hunter-gatherers traded roots for berries an iron law of economics has held absolutely firm: Anything and everything is worth only what you can get someone else to pay for it.

As for Facebook? What it is worth will be whatever price its investment bankers can get for it. When Facebook actually prices an IPO, we'll get a decent idea of a market assigning a presumably realistic value. Now price and value can be two very different things, and we'll have to wait for the IPO hype to fade to reconcile the two. Facebook -- just like every other stock in the world -- will have its value assessed and reassessed each and every trading day.

Until then, we should all just chill out on what this privately held company is worth. We'll know when we know. Besides, as I've said before, IPOs may be fun to read about, but that's as far as most investors should ever get involved. Jumping on the latest sexy name has no part in any long-term, disciplined investing strategy anyway.

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