Goldman Sachs has distributed a 100-page document to prospective investors in the Facebook deal. Whether you’re in on it or not, here’s everything you need to know about this transaction.
It’s too late to join if you’re not already in
Goldman has invested $450 million of its own funds in Facebook shares, and it has set up a $1.5 billion special purpose fund for its clients who must buy a minimum of $2 million to participate. Despite fees of four percent upfront, plus five percent of any gains and a fraction of a percent for placement, the deal is oversubscribe. The deadline for opting in closed yesterday, earlier than originally planned yesterday; the bank has had to tell clients that they might get fewer shares than they originally requested. However, a clause in the offering documents gives Goldman the right to “reduce its exposure to” the Facebook investment without telling its client participants. This could include either selling to another institutional investor or entering a derivatives contract.
Facebook will publicly disclose financials by April 2012, and possibly IPO
Facebook intends to spread beyond 500 shareholders this year. That will require the company to start disclosing financial information or have an initial public offering by April 2012. Even if the company remains privately held, having more than 500 shareholders will still require the first disclosure of financial results around the end of April 2012. Often the need to comply with this requirement prompts companies to decide they might as well go public, according to the Wall Street Journal.
Facebook allegedly had fewer than 500 shareholders at the end of 2010, according to an off-the-record conversation noted in the Journal, but that must be a tally only of holders outside of the company, since the number of employees is approaching the 2,000 mark. The social network obtained Securities and Exchanges Commission approval in 2008 to issue stock to staff.
The Journal said that unnamed executives at Facebook feel that the way shares are trading on private secondary markets subject the company’s value to inconsistency. That alone eliminates a key benefit of avoiding the public markets. But bringing Goldman into things has had the unintended consequence of airing more data to the public than anticipated.
Facebook’s revenues are revealed
Reuters has reported that the Goldman offering documents say Facebook earned $355 million in net income, off of $1.2 billion in revenues, during the first three quarters of 2010. Those numbers might at first suggest that the social network is more profitable than previously reported, despite lower revenue. Actually, this is a comparison of apples to oranges: These newest figures are what accounting geeks call non-GAAP (the acronym stands for Generally Accepted Accounting Principles) while the prior ones are GAAP.
Assuming the Reuters report is correct, Facebook would have at least $500 million in net income for 2010, with an operating margin of up 30 to 40 percent.
Terms like “operating margin” are usually clues that a set of financial results are described in non-GAAP terms. Operating margin differs from a profit margin in that the former conveniently excludes one-time expenses, acquisition costs and, well, anything accountants can get away with excluding. This dressing-up of the numbers is neither good bad, but only typical of how accountants prepare balance sheets, statements, earnings and so on in order to impress investors. Welcome to the world of public financial disclosures.
The SEC has questioned Goldman about the deal
The offering document includes a disclosure that the SEC has asked Goldman about the Facebook deal, according to the New York Times. Apparently the regulator made more than one inquiry, albeit “preliminary” in nature. The structure of the transaction is a concern, along with the leaking of details to the media. The latter violates “no hype” rules, which could jeopardize the offer. Like the NYT said:
The offering – and the news report about it – appears to have surprised the SEC. While some people involved in the deal had said that Goldman had briefed the SEC on the private offering, those same people said they were mistaken and that the firm had not contacted the agency.
Do you think the deal will still go forward as is?