Nothing Ever Happens

Now that Facebook raised $240M from Microsoft at a $15B valuation, with revenues of $100M-$150M and $30M in profits, people wonder where is the math. The valuation puts Facebook as the 5# most valuable U.S. internet firm (blogs report about an additional $500M invested in Facebook by two hedge funds).

The Facebook valuation enigma was greatly answered by JohnM on Techcrunch and should become an MBA strategy classic:

“Microsoft is LEASING Facebook for the next 4 years. Facebook is not worth $15B, Microsoft is leasing an advertising distribution system. The equity ownership is so small as to become almost immaterial.

Of course, Facebook will now attempt an IPO northwards of $15B, saying that Microsoft already set the valuation floor. Of course this assumes all the lawsuits regarding ownership are settled.

If the company does go public, what the myopic public should realize is that they are not buying the advertising deal, along with shares. Only Microsoft gets that. Don’t be fooled, Ballmer cut a better deal than the public will ever get. Microsoft is NOT valuing Facebook at $15B. No, no, no. Microsoft is valuing a potentially lucrative advertising distribution deal and a small percentage of Facebook at $240MM.

The public are sheep though, so I imagine Facebook will line-up the investment banking sheperds to take them out at $20B+.

Now why might hedge funds get involved? Because the bump-up in valuation will go from 15B to $20B on an IPO. Nice % increase for a holding period of likely only a few quarters.

But keep in mind, it’s the investing public (proxied through mutual fund managers, etc.) who will pay the price for all of this. Feels like 2000 all over again. Great move for Facebook, probably a smart move for Microsoft, and probably a smart move for the hedge funds. But remember, this is a game of musical chairs. And as usual it is often the naive public investor left standing.”