Goldman-Facebook Deal May Smell, but How About the Rest of Business?
The Goldman Sachs (GS) $500 million investment in Facebook -- and the deal to let its top clients buy as much as $1.5 billion of the company's stock, has raised a lot of eyebrows. Including at the SEC, which is apparently concerned that someone found an end-run around rules of when a company must go public, and invite all the scrutiny that goes with the process.
Kara Swisher at All Things Digital raises some interesting questions. Not about the legality so much as the apparent ickiness of giving the already-well-off even more first chances at making money through a series of financial contortions. Chances that the employees that helped make Facebook haven't had since last April, when the company prohibited private sales. Her points are good, but I wonder if Facebook is really an extreme. Or does the combination of Zuckerberg's high profile and Goldman Sachs's reputation from the global financial meltdown simply make obvious something that has existed all along?
Maybe putting off an IPO is a matter of nostalgia for Facebook. After all, this may be as close as CEO Mark Zuckerberg and his team can get to the word private. Will Facebook eventually go public? Of course -- big investors eventually demand the chance for big liquidity and the ability to cash out.
And, to be fair, staying private is about more than keeping the financials secret. One of the big complaints you can hear from executives is the difficulty of running a corporation when under the pressure of satisfying Wall Street's hunger for quarterly growth. Sometimes rational and intelligent management means ignoring a short-term monetary hit to better support a company's ongoing prospects. That's something you rarely get to do in a public company.
As Swisher put it:
Aside from the appalling image that only the very wealthy can get an early shot at Facebook shares, which instantly became a press meme yesterday after the Goldman deal was announced, pretending this single investment entityâ€"called a "special purpose vehicle"â€"simply feels like a Wall Street trick.But is this really different from business as usual? Union pension funds and mutual funds are some of the biggest institutional investors around. They are "single" entities, even though they can represent the financial interests of many thousands of individuals. But these vehicles have been on the road for many years. And there's nothing new with trying to legally get one over on the government. Just ask Google (GOOG), which, like many other companies, hides billions in overseas profits from the tax man.
Additionally, wealthy and connected people always get early access to IPOs -- the so-called friends and family group. And the regular employees, who often have toiled for years to make a company a smash, often must hold their shares for some period of time after the IPO. After the founders and major investors get to partake of a share price that might be the highest the company will see for years.
Did Zuckerberg screw over the Winklevoss twins? Perhaps. But how often have venture capital firms swooped in to take control and an overwhelming portion of the value of a company from the founders, simply because the VCs were slick and fast talking and the entrepreneurs naïve?
Would I personally trust Zuckerberg's ethics, were I to find myself in a business deal that involved him? Not a chance. But neither he nor the deal with Goldman Sachs is the first sign of darkness in business. Sneakiness and backstabbing in the form of clever tactics is as old as human nature. Unfortunately.
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