Deals

Facebook Sitting Pretty With $200M Investment

One figure that’s drawn much attention in Facebook’s US$200 millioninvestment deal with Moscow-based Digital Sky Technologies announcedTuesday is the implied valuation of the privately held socialnetworking company: $10 billion.

While impressive, the number is off a third from the $15billion figure floated after Microsoft invested $240 million inFacebook in November 2007.

Still, there’s no reason to shed tears for the Palo Alto, Calif.-basedcompany, Gartner analyst Ray Valdes told the E-Commerce Times onWednesday.

Given the rough state of the economy, the valuation — which arisesfrom determining how much the investor will pay for a given percentageof the firm — may be more than “good and fair,” which is how CEO Mark Zuckerberg described it Tuesday in a conference call with reporters.

“I think it’s actually good news for Facebook,” Valdes said.

Microsoft Deal No Benchmark

The Microsoft transaction took place at the peak of the stock market inNovember 2007, and Microsoft’seagerness to make the deal with Facebook had less to do with thecompany’s overall worth than with Microsoft’s ownbusiness agenda, Valdes noted.

“There are many ways in which the investment and its valuationshould not be a benchmark for future investments,” he said.

Details of DST Investment

DST’s investment deal with Facebook calls for the Moscow-based technology holding company to provide the social network with $200 million in return for a 1.96 percent ownershipstake.

DST will not acquire any management rights, but Zuckerberg told reporters that he hoped the alliance would become a strategic one in which DSTexecutives would aid Facebook as it expands worldwide.

Side Investment for Stock Sales

Under terms of a side deal to the transaction, DST plans to buy $100million in stock held by employees. Facebook had tried to launch aprogram last year allowing employees to sell some vested stock, butthe third-party deal did not go through.

The global marketcollapse that accompanied the recession played a role in that failure, Facebook spokesperson Larry Yu told the E-Commerce Times, but he declinedto provide details.

Getting that stock sale program off the ground is critical to Facebook as itworks to further expand its offerings, Valdes said.

“A key asset for Facebook and other innovative software companies isits employees, who work there not just for salary but for thepotential of cashing in through stock options,” he said. “This sideinvestment by DST gives some benefits of public stock without havingto go through an IPO.”

Zuckerberg: Cash Not Needed for Operations

DST’s investment will provide a cash cushion as Facebook continues to experiment with new revenue models and pursues itsglobal expansion efforts, Zuckerberg said.

“We don’t have any specific plans to talk about at the moment, butit’s nice to have the flexibility that having this extra capital willafford us,” he told reporters.

Facebook is likely to make use of the cash, in Valdes’ view.

“Facebook is experiencing high growth and needs to build out itsinfrastructure,” he said. In addition, its market is maturing andbecoming more competitive. Lastly, global expansion is an imperative.”

Despite Economy, Facebook Metrics Improve

The investment is evidence Facebook continues to do well despite therough global economy, Zuckerberg claimed.

Advertising is doing well, and Facebook has continued to forge newparternships to help users and companies share information andcommunicate more freely, he noted.

“Thanks to all of these efforts, our business is doing really well, andwe’re on track to create a nice self-sustaining business, and becauseof this, a lot of companies and firms have approached us aboutinvesting in the company,” commented Zuckerberg.

Facebook is not required to release financial reports because it is a privatelyheld company; however, Zuckerberg told reporters that the company hasbeen profitable — before interest, taxes, depreciation andamortization — for five consecutive quarters, that revenue should grow morethan 70 percent year over year, and he expects it to be cash-flowpositive in 2010.

That said, like all social networking sites to date, Facebook has yetto find the right mix of revenue-generating offerings to fully tap itspotential, observed Valdes.

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