Tag Archives: John C. Abell

Goldbook Or Facesachs?

Anupreeta Das, Robert Frank and Liz Rappaport and Wall Street Journal:

It was supposed to be Wall Street’s hottest tech deal in years: the private offering of as much as $1.5 billion in shares of Facebook Inc. And it was a coup for the company’s adviser, Goldman Sachs Group Inc., the most envied firm on the Street.

Goldman bankers burned up the phone lines in the first week of January, pushing many of their best American clients to invest in the deal. And then, on Sunday and Monday, those same advisers were on the phone with those same clients with some bad news. They wouldn’t be getting any Facebook shares after all.

Now, Goldman has a very different mission to execute: soothing a legion of irate investors.

Goldman Sachs experienced a slowdown in many of its divisions in the fourth quarter, and earnings dropped 53 percent, to $2.39 billion, or $3.79 a share.

While the per-share profit in the quarter was modestly higher than the $3.76 a share analysts polled by Thomson Reuters were projecting, it was a stark reminder of how challenging the markets had been for firms like Goldman during the last year.

David Viniar, Goldman’s chief financial officer, told analysts in a conference call on Wednesday that the revenue slowdown came amid client uncertainty about the economy and regulatory reform. With client activity down, fees dropped, too.

Revenue in its powerful fixed income, currency and commodities unit, known as F.I.C.C., fell 48 percent, to $1.64 billion, from the period a year earlier. Investment revenue, which includes equity and debt underwriting, fell 10 percent, to $1.51 billion.

Over all, net revenue in the quarter was $8.6 billion, off 10 percent from the period a year earlier. For the year, revenue minus interest expenses fell 13 percent, to $39 billion, compared with 2009. Full-year earnings were $8.35 billion, 38 percent lower than 2009.

“Market and economic conditions for much of 2010 were difficult, but the firm’s performance benefited from the strength of our global client franchise and the focus and commitment of our people,” Lloyd C. Blankfein, chairman and chief executive, said in a statement. “Looking ahead, we are seeing signs of growth and more economic activity, and we are well-positioned to help our clients expand their businesses, manage their risks and invest in the future.”

Juli Weiner at Vanity Fair:

As the bank was reminded earlier this week, though, money can’t buy Friends: Goldman’s abrupt inability to sell shares of Facebook to select American investors has not sat well with select American investors, or with Facebook. “They pushed me hard to get here and invest, and then they pull the rug out from under me,” one such spurned Goldman client told The Wall Street Journal. “The whole thing has left a bad taste in my mouth.” To describe the highly public, fruitless Facebook fiasco, one might even invoke a phrase from Goldman’s recent past: “shitty deal.”

Earlier this month, Goldman solicited certain investors with poorly written offers to purchase Facebook stock. However, given the round-the-clock, breathless coverage of the firm’s $450 million investment in Facebook, Goldman rescinded the offer to U.S. clients in deference to “rules limiting [the] marketing of private securities.” according to Bloomberg.com. “Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a US private placement under US law,” the bank said in a statement on Monday. “We regret the consequences of this decision, but Goldman Sachs believes this is the most prudent path to take.”

Facebook executives were reportedly “miffed” about the public scrutiny surrounding the investment opportunity, according to the Journal. The offering “turned out to be far more public than they expected.” Should have checked the privacy settings!

John Cassidy at the New Yorker:

What does this mean? Over at Dealbook, Andrew Ross Sorkin fills in some details: “Federal and state regulations prohibit what is known as ‘general solicitation and advertising’ in private offerings. Firms like Goldman seeking to raise money cannot take action that resembles public promotion of the offering, like buying ads or communicating with news outlets.”

So Goldman couldn’t go ahead with the Facebook offering because it would be getting too many media inquiries? Come on. Only last week, Groupon, the group-buying Web site, raised $950 million in a private placement arranged by Allen & Co., the boutique investment bank. Extensive media coverage of that deal didn’t prevent some of Silicon Valley’s leading venture capital firms from plonking down almost a billion dollars, which Groupon is planning on using to fund its expansion prior to an I.P.O.

Goldman could easily have arranged a similar money-raising exercise for Facebook. However, it probably wouldn’t have been able to do such a deal at a valuation of fifty billion dollars—the price it has purportedly put on Mark Zuckerberg’s business. Despite Facebook’s rapid growth, many venture-capital outfits would have been reluctant to buy its equity at a multiple of thirty or forty times revenues. (Estimates of Facebook’s revenues range from one to two billion.) Rather than tapping the VCs at a lower valuation, Goldman decided to set up a special-purpose vehicle (i.e., a shell company) through which hundreds, and perhaps thousands, of wealthy individuals (American and foreign) would be offered the privilege of purchasing Facebook stock prior to an I.P.O.

With all due respect to Goldman and its high-priced attorneys, it wasn’t a hostile media that upended this plan. It was the fact that it appeared to many people (not just reporters) to be a blatant effort to circumvent the Securities Exchange Act of 1934, which decrees that any company with more than five hundred shareholders is legally obliged to issue public financial statements, something that Facebook is keen to avoid, at least for now. Under Goldman’s scheme, all the investors in its special-purpose vehicle would be counted as a single “beneficial” shareholder, thereby excluding Facebook from this disclosure provision. (An illuminating discussion of the legal niceties can be found at Dealbook.)

Having been a keen observer of Goldman for some twenty-five years (sometimes as a critic but often as an admirer of its meritocratic culture and the quality of the people it employs), little that the firm does surprises me. But this entire imbroglio has left me puzzled and raised more questions in my mind about Goldman’s senior management.

It is surely fair to assume that the bright spark in Goldman’s investment-banking division who came up with the original Facebook proposal hadn’t seen the report of the Business Standards Committee. Let’s further stipulate that when somebody more senior asked him (her) if the deal was legit, he (she) said, a) Goldman’s top lawyers had signed off on it, and b) it would give Goldman a lock on Facebook’s I.P.O., which many bankers expect to be the biggest (and most lucrative) yet seen in the United States.

Felix Salmon:

In other words, Facebook has a speculative shareholder for the first time, now that it’s made its decision to get into bed with Goldman. And Goldman will think nothing of buying puts or selling calls on Facebook shares — or even dumping its shares outright, if it’s allowed to do so — if that’s what it needs to do to protect its $450 million investment.

As the same time, however, one of the main unwritten rules of IPOs of young companies is that they always need to be priced at a level above their last funding round. If Facebook can’t IPO at a valuation significantly north of $50 billion, then it probably won’t come to market at all. (That probably explains why bidders on SecondMarket are happy to buy at a $70 billion valuation: they’re betting that when Facebook goes public, it’ll be worth more than that.)

A lot of stuff can happen to Facebook between now and a 2012 IPO. And if Goldman is shorting Facebook rather than massaging its valuation and orchestrating an IPO which values the company at $70 billion or more, then maybe Facebook won’t go public at all next year. Maybe, indeed, Facebook will learn from this whole episode that dealing with investment banks is an unpleasant and expensive exercise, and will try to avoid doing so in future as much as it possibly can.

John Hudson at The Atlantic with a round-up.

John C. Abell at Wired

Joe Weisenthal at Business Insider:

The Facebook deal itself was already going to be controversial, because at first blush it came off like Goldman finding a way to skirt securities regulations (though later it was made clear that regardless of whether it did a real IPO, Facebook would report financials).

As for the current mess, it’s still a little unclear how it happened.

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When The Old Men Talk About The Googles, We All Strain To Listen


Jared Newman at PC World:

Once News Corps’ Web Sites go behind a paywall, chief executive Rupert Murdoch suggested that they’ll disappear from searches on Google and other engines.

Murdoch was responding to Sky News political editor David Speers, who asked why News Corp. hasn’t blocked search engines from indexing sites. “Well, I think we will, but that’s when we start charging,” Murdoch said.

In August, Murdoch said that all News Corp. Web sites will go behind a paywall by next summer, a bold move as many Web sites have abandoned their unsuccessful paid subscription strategies, relying on eyeballs and advertising revenue instead.

I’m not sure Murdoch fully understood Speers’ question about blocking search engines, because he then adds “We do it already with the Wall Street Journal. We have a wall, but it’s not right to the ceiling.” Many reports on Murdoch’s comments suggest that Murdoch will block search engines entirely, but that’s not the case with the Wall Street Journal. You can still find occasional stories by searching Google News.

Regardless of what Murdoch meant, the bigger point remains that he’s not interested in readers who find News Corp. articles through search engines. “Who knows who they are or where they are,” Murdoch said, referring to search-driven visitors, “and they don’t suddenly become loyal readers of our content.”

Murdoch’s philosophy of getting money from loyal readers is still a huge gamble, because there’s no guarantee those readers will stick around once they’re forced to pay. Think of it this way: If we’ve been friends for five years, and I suddenly tell you that our friendship requires a lot of work on my end, and that I’ll need money to keep it going, will you happily pony it up because you value what I provide, or will you look for someone new?

John C. Abell at Wired News:

Rupert Murdoch has made this kind of noise before (and he gets wrong the extent of actual public access to Wall Street Journal content online, which is 100%). But in an interview with Sky News the News Corp chairman sounds a lot like he would be inclined to take up Google on its oft-repeated suggestion — to all old media titans who think they are being ripped off — to programatically withhold content from the search giant’s massive gene pool of news links.

We all know that these are uncertain times for traditional publishers. Newspaper circulation is cratering; the latest numbers show it down another 10% in the last year, and Murdoch’s New York Post is down nearly 30% in the past 2-1/2 years).

Many newspaper executives grumble that the internet’s link economy is to blame. But we’ll believe that New Corp intends privatize all of its digital content when we see it. This just might be Murdoch’s way of goading competitors to beat him to a punch he never intends to throw. Nevertheless, he talks the talk very well.

“We’d rather have fewer people coming to our web sites — but paying,” Murdoch tells Sky News Australia, explaining that “the fact is, there isn’t enough advertising in the world to go around to make all the websites profitable.”

Ryan Tate at Valley Wag:

This isn’t the first time Murdoch, 78, and his lieutenants have been made unfriendly noises about Google; they’ve recently attacked the search engine as a “parasite” with “promiscuous” users. This hostility must seem perfectly sensible if you’re an old man who has your secretary find and print up Web pages on your behalf. But here’s a pro tip, Rupert: Old media doesn’t instant message those pages to your assistant’s Twitter, via Blogger, on AOL. She just does what your newspaper reporters and Fox News producers and sales executives and tabloid editors and attack-dog flacks and mid-level accountants do all the time every day: Sticks a hot, throbbing search query into Google and gets busy with a bunch of strange website she doesn’t subscribe to. Welcome to the internet.

Stan Schroeder at Mashable:

It proves that Murdoch is sticking with the old model of how news and information is disseminated, and doesn’t plan to change it. The problem is, things don’t work the way they used to any more. Sometimes, a visitor will come to a news site or a blog and won’t even know where he is; he might think he’s still on Facebook (Facebook) or MySpace (MySpace). And he won’t be interested in anything on the site except that tiny bit of information that made him click on the link. Sometimes, the conversation will develop around your article, but not on your site; it may develop on Twitter (Twitter) or Digg (Digg). As a site owner, you have to adapt to this. If you plan to just ditch all these visitors, claiming they’re all worthless, you might end up with an empty auditorium.

E.D. Kain at The League:

Rupert Murdoch, media mogul extrordinaire, has decided that links coming from the search engine monolith Google are parasitic and should be banned outright.  Yes – what most of us online strive for – links from everywhere and especially Google – Murdoch has decided actually hurts his business model.  This really, really confuses the hell out of me.

I was always under the impression that links pointing people to your content improved the visibility of that content – paywall or no.  I guess, one way or another, this move will be a great experiment for the online news model.

UPDATE: Conor Friedersdorf and Julian Sanchez at Bloggingheads

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