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One figure that's drawn much attention in Facebook's US$200 million investment deal with Moscow-based Digital Sky Technologies announced Tuesday is the implied valuation of the privately held social networking company: $10 billion.
While impressive, the number is off a third from the $15 billion figure floated after Microsoft (Nasdaq: MSFT) invested $240 million in Facebook in November 2007.
Still, there's no reason to shed tears for the Palo Alto, Calif.-based company, Gartner (NYSE: IT) analyst Ray Valdes told the E-Commerce Times on Wednesday.
Given the rough state of the economy, the valuation -- which arises from determining how much the investor will pay for a given percentage of the firm -- may be more than "good and fair," which is how CEO Mark Zuckerberg described it Tuesday in a conference call with reporters.
"I think it's actually good news for Facebook," Valdes said.
Microsoft Deal No Benchmark
The Microsoft transaction took place at the peak of the stock market in November 2007, and Microsoft's eagerness to make the deal with Facebook had less to do with the company's overall worth than with Microsoft's own business agenda, Valdes noted.
"There are many ways in which the investment and its valuation should not be a benchmark for future investments," he said.
Details of DST Investment
DST's investment deal with Facebook calls for the Moscow-based technology holding company to provide the social network with $200 million in return for a 1.96 percent ownership stake.
DST will not acquire any management rights, but Zuckerberg told reporters that he hoped the alliance would become a strategic one in which DST executives would aid Facebook as it expands worldwide.
Side Investment for Stock Sales
Under terms of a side deal to the transaction, DST plans to buy $100 million in stock held by employees. Facebook had tried to launch a program last year allowing employees to sell some vested stock, but the third-party deal did not go through.
The global market collapse that accompanied the recession played a role in that failure, Facebook spokesperson Larry Yu told the E-Commerce Times, but he declined to provide details.
Getting that stock sale program off the ground is critical to Facebook as it works to further expand its offerings, Valdes said.
"A key asset for Facebook and other innovative software companies is its employees, who work there not just for salary but for the potential of cashing in through stock options," he said. "This side investment by DST gives some benefits of public stock without having to go through an IPO."
Zuckerberg: Cash Not Needed for Operations
DST's investment will provide a cash cushion as Facebook continues to experiment with new revenue models and pursues its global expansion efforts, Zuckerberg said.
"We don't have any specific plans to talk about at the moment, but it's nice to have the flexibility that having this extra capital will afford us," he told reporters.
Facebook is likely to make use of the cash, in Valdes' view.
"Facebook is experiencing high growth and needs to build out its infrastructure," he said. In addition, its market is maturing and becoming more competitive. Lastly, global expansion is an imperative."
Despite Economy, Facebook Metrics Improve
The investment is evidence Facebook continues to do well despite the rough global economy, Zuckerberg claimed.
Advertising is doing well, and Facebook has continued to forge new parternships to help users and companies share information and communicate more freely, he noted.
"Thanks to all of these efforts, our business is doing really well, and we're on track to create a nice self-sustaining business, and because of this, a lot of companies and firms have approached us about investing in the company," commented Zuckerberg.
Facebook is not required to release financial reports because it is a privately held company; however, Zuckerberg told reporters that the company has been profitable -- before interest, taxes, depreciation and amortization -- for five consecutive quarters, that revenue should grow more than 70 percent year over year, and he expects it to be cash-flow positive in 2010.
That said, like all social networking sites to date, Facebook has yet
to find the right mix of revenue-generating offerings to fully tap its
potential, observed Valdes.
