Facebook friends Goldman Sachs and the rich get richer

• January 04, 2011

By Alexandra Reid

Facebook has raised US$500 million from Goldman Sachs and Russian investment firm Digital Sky Technologies, according to the New York Times.

The injection of cash values Facebook at about $50 billion. The social network now has a bigger capitalization than Boeing, at $48.7 billion, and Time Warner, at about $36 billion. The deal has reportedly fueled the U.S. Securities and Exchange Commission’s examination of the growing trade of privately held shares of well-known social networking sites. The concern is that Goldman is planning to craft a “special purpose vehicle” that may be able to dodge the 500-shareholder rule, which requires a company to disclose certain financial information to the public, even if it hasn’t filed for an initial public offering. Through this vehicle, the investment would be managed solely by Goldman and therefore would be considered just one investment, even though it could potentially pool investments from thousands of clients.

Facebook, Goldman and Digital Sky have so far declined to comment on the arrangement.

Facebook CEO and Time Magazine’s Person of the Year, Mark Zuckerberg, has previously resisted pressure to launch an IPO, focusing instead on boosting registration and website integration with Facebook’s technology. Government regulation and public scrutiny go hand-in-hand with an IPO, which poses a potential threat to Facebook. Like Google before it, Facebook wants to stay private as long as possible to avoid investor complaints regarding strategy, public inquiry of its finances and potential management disruptions. The new injection of Goldman cash may help to further delay any possible Facebook IPO.

As the conglomerates brood, I can’t help but reflect on what this means to me as a frequent user of social media in both my personal and professional lives. I feel that I have a duty to keep myself and others informed about the suspicious interests Goldman might have in Facebook, namely its bank of personal information, and what this might mean for the Web in the long run.

As one zealous CBC commenter so eloquently put it:

“Isn’t that terrific? The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses – high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All of that money you’re losing, it’s going somewhere, and in both literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth – pure profit for rich individuals. Lloyd Blankfein and Mark Zuckerberg working out a deal behind close doors that allows them to keep tabs on more than 500 million people. Hmmm?”

While you may not agree entirely with this argument, I think this individual summarizes some key points of concern.

Some points you may want to consider:

• Keeping Facebook privacy settings high has been a topic of discussion for some time now. Go back and double check your settings to make sure you are only sharing what you want. As Wired reported in April last year, “at its f8 conference, Facebook announced it was sending user profile information in bulk to companies like Yelp, Pandora and Microsoft.” With this injection of cash, it is speculated that Facebook won’t have to go public for at least a year. In that time, personal information may be up for grabs.

• Keep tabs on the news in the coming months to determine Goldman’s real influence on Facebook. Goldman hopes to turn a huge profit when Facebook goes public on the stock market, but Zuckerberg has a history of resisting this move. If Goldman gets away with its “special purpose vehicle,” it could mean more deals like this in the future for other online companies. For example, over the last several months, vehicles have been formed by a number of smaller Wall Street brokerages to help investors obtain shares in private Internet companies such as Twitter.

• This huge sum of cash from Goldman will allow Facebook to hire internal engineers instead of outsourcing to independent startups. Facebook could come to resemble Google in Silicon Valley. However, as Read Write Web reports, Goldman’s investment in Facebook could initially benefit tech startups as the company’s young leaders are likely to spend their money in them. Early Facebookers have backed many tiny new companies, some of which may be acquired later by Facebook. This trend might continue to some degree in the near future.

What does this deal mean to you?

Photo from: 100 Treatises