There is news out today that social networking leader Facebook has secured a $200 million financing from Digital Sky Technologies, an internet investment group with significant stakes in Eastern European and Russian Internet businesses.  It is interesting that the 1.96% equity stake (in preferred stock) was at a valuation of close to $10 billion, but it is more interesting how the valuation compares with the past and what this means for a future of an initial public offering.

Microsoft (NASDAQ: MSFT) took a similar stake in the company long before this.  The $240 million investment in late 2007 was for a 1.6% stake for which if you do the math should generate roughly a $15 billion valuation.  So eighteen months later, Facebook is valued at an implied two-thirds of what had been.  At the time, Microsoft was said to have beaten out Google Inc. (NASDAQ: GOOG) in the investment process.

What does this do for News Corp. (NYSE: NWS)?  Rupert Murdoch was looking like a champion for buying the then-leader MySpace, yet the income has never caught up with the valuation.  Certainly, the value of MySpace has to be higher than it was, but the issue of securing ample advertising makes this actually elusive as these traditional “per user” metrics do not for valuations in social networks.

Facebook has roughly 200 million members, and this latest investment value gives it an implied $10 billion valuation.  Its 2008 revenues were said to be around $300 million.  Murdoch and News Corp. paid roughly $580 million in in 2005 for Intermedia, the then-owner of MySpace.  comScore said that Facebook passed MySpace up in early 2008, and it was in 2006 when Google (NASDAQ: GOOG) scored that advertising and search pact for MySpace.

DST will not be represented on the Facebook board, nor will it hold special observer rights.  In addition to the Facebook round of financing, DST has indicated that it is planning to offer to purchase at least $100 million of Facebook common stock from existing common stockholders.  This will facilitate liquidity for current and former employees’ vested shares in the company, and details will be made to eligible participants during the summer.

Based in London and Moscow, DST has investments in Russia and Eastern Europe, such as Mail.ru, Forticom and vKontakte. DST’s main assets account for over 70% of all page views in the Russian-speaking internet and its social networks are the market leaders in more than 13 countries.  DST is run by its three partners:

• Yuri Milner, previously CEO of Mail.ru, the #1 Russian language website;
• Gregory Finger, previously head of the Moscow office of NCH, a multi-billion dollar hedge fund;
• and Alexander Tamas, previously co-head of Internet and software coverage in EMEA for the Investment Banking Division of Goldman Sachs.

Yahoo! is said to be back in the realm of buying or investing in this sector.  Time Warner Inc. (NYSE: TWX) has invested in social media and is also said to be in the space.

So, the number one issue is still at hand… When will Facebook come public?  Had the stock market not crashed, it is believed by us and many that this company would have already made in IPO debut.  The problem on a post-recession basis is that Facebook cannot at this point use arbitrary valuations for a solid public offering of stock.  At least not logically.  A valuation of $10 billion and roughly 200 million users is a value of $50.00 per user.   But that is also a value of about 33-times trailing revenues, and that is a high number regardless of what metrics get used in valuing companies.  That per user valuation does not sound expensive, but advertising revenues in the land of social media are at far lower rates and there is a common belief that advertising in this space is much less effective than in targeted advertising on specialty websites.

Facebook could still come public if it chooses to.  As long as usage rates stay high and as long as the user base remains high, there can always be an embedded call option in the network measured on a per user basis.  But by historic measurements and in a recession, that number will be far lower than what it would have been back in the tech bubble or even back when social media was the next major untapped investment frontier.

Sadly, this is just another missed opportunity for Yahoo!  The old (and current) Yahoo! Groups was a series of specific groups in this space that could have had a lead above and beyond what any of the specialty social networks offered in 2007 and what they offer now.  These have been around forever in Internet years.

Facebook can still come public if and when it chooses.  Its name alone would allow it get the subscriptions needed.  At what real valuation is where the discrepancies will likely come into play.

JON C. OGG
MAY 26, 2009

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