When You Are A Public Company Without Being Public

This happened a bit with Google early this decade and it was certainly part of their decision to go public (reluctantly). Now it is happening to Facebook, and has been happening for some time.

There has been an active secondary market in employee shares in Facebook for the past year or two. Though I've never bought in that market (contrary to some comments on Techcrunch's post last night), I know a few people who have. That market has been in the $9/share to $11/share range which equates to something like a $4bn to $5bn valuation.

And Facebook's numbers have become public as well, partly because Mark Zuckerberg has made them public and partly because Facebook is a leaky company. Eric Eldon wrote this last night:

Facebook made under $300 million last year, was a little shy of breaking even, and at first expected to make towards $400 million in revenue this year.
But the company said in late March — incidentally at the time that
chief financial officer Gideon Yu left the company — that it was
beating projections by 70 percent. I’ve confirmed that this run rate
has the company possibly breaking half a billion in revenue by the end of the year.

And Zuckerberg wrote this in his letter to employees announcing that Gideon Yu was leaving:

Based on our first quarter results, we now believe we are on track to
see our revenue grow by at least 70% this year. We just completed our
fifth straight quarter of EBITDA profitability. And most importantly,
we expect to achieve free cash flow profitability next year.

So while it is not quite like preparing and sending a 10Q or 10K to the SEC every quarter, Facebook is letting the world know the basics of their financial situation. We also know, apparently, that Facebook has over $200mm in cash on its balance sheet.

And now comes the news that Facebook is finally receiving offers for more funding (they have been seeking to raise additional capital for some time). And we are getting to see that play out right in the public. Arrington says the price offered is $2bn. Eldon says the price offered is $4bn.

Who knows if either of these stories is correct. I've learned from personal experience that you cannot believe much of what is written in the tech blogs, particularly about deals. When you are in the middle of these deals and you read some of the stuff that is written about them, you just have to wonder sometimes.

But when there is smoke, there is usually fire. I suspect that Facebook is getting offers to invest and they are coming in at prices that the Board doesn't like. And they are coming in at prices that are substantially below Microsoft's $15bn. That should not be surprising to anyone. First, the public markets are down 40-50% since then. Second, we all knew that $15bn price was a premium based on the strategic relationship the two companies have.

Is $4bn (the more credible number) the right price for Facebook? I don't know. It's in the ballpark. I suspect if they are EBITDA profitable now and if they will be cash flow positive next year, it's a reasonable call to wait for a better price.

Say what you will about Facebook, and a lot of people are trashing the company these days, it has 200mm users worldwide. It is building the social graph of the world. It is a very valuable and important asset. And apparently it is profitable.

It is also essentially a public company now. There is a market in their shares. The company's basic financial information is available for our consumption and analysis. And we even are getting to see it's financing play out publicly.

I suspect that Facebook is seriously considering doing what Google did and biting the bullet and going public. The IPO market is coming back (that's my gut). And at this point, there isn't much cost (other than finacial costs of being public) that Facebook isn't already paying.

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