Goldman Sachs' plan to offer clients up to $1.5 billion in Facebook equity has many on Wall Street wondering if the vampire squid has a secret plan to force the social network to go public.
“Maybe it’s just envy talking—we would have killed to be in this deal—but part of me wonders if Goldman is pulling a fast one on Facebook,” an executive at a rival Wall Street firm told me last night.
His theory is that Goldman might welcome a ruling by the Securities and Exchange Commission that would declare the firm’s Facebook fund to be nothing other than an attempt to circumvent securities laws. If the SEC took this stance, it might declare each of the investors in the fund to be investors in Facebook itself—bringing Facebook over the 500-investor threshold and forcing it to make the kind of financial disclosures that a publicly held company must make. Once Facebook triggered the disclosure rules, the theory goes, it might well decide to finally sell shares to the general public.
That does sound a tad bit paranoid. But when I asked around, I discovered that a great many people on Wall Street at least find some version of this theory plausible.
Goldman is viewed by many on Wall Street as a kind of supremely clever super-villain. The working assumption is that whatever is known about Goldman’s tactics and motives is just a fraction of a far more complex scheme. Even the knowledge that this may be nothing more than paranoia fueled by envy doesn’t stop people on Wall Street from taking the view.
“In the presence of Goldman Sachs, paranoia is another word for intelligence,” is how one private equity executive—whose firm frequently turned to Goldman for financing—once put it to me.
Goldman has not done much to downplay this view of the firm. Indeed, at times it seems to revel in it.
"We didn't have the word 'client' or 'customer' at the old J. Aron [the commodities trading firm Goldman acquired back in the 1980s]. We had counterparties - and that's because we didn't know how to spell the word 'adversary,'" Goldman CEO Lloyd Blankfein once said.
An initial public offering could be a bonanza for Goldman. Even if Facebook drives a hard bargain to keep down fees for a public offering, Goldman would probably collect at least 5 percent of the total amount sold at the IPO. On top of that, it stands to make 5 percent on any gains made by investors in its Facebook fund. Additionally, a publicly held Facebook would probably see tax advantages in debt financing and engage in more acquisitions—generating even more fees for Goldman.
An IPO would also turn many Facebook employees into very wealthy people—and potential clients for Goldman’s wealth management arm.
On Wall Street, the assumption is that Goldman looks at its $450 million investment in Facebook as the entry price for becoming Facebook’s go-to banker.
It’s not strictly true that Goldman and the investors in its fund need an IPO to profit. For one thing, Goldman will make $60 million of its investment back almost immediately by charging the investors in the fund a 4 percent fee.
What’s more, Facebook could buy back the stake it's selling. But since it would likely have to turn to capital markets to raise the money for such a repurchase, that possibility is remote. More likely, the investors could sell their stakes in the fund, after the lock-up period expires, to other qualified investors in private transactions.
But make no mistake—it’s very likely that Goldman and many of its investors expect an IPO soon. And while it may be too paranoid to suspect that Goldman is planning for the SEC to use the existence of the Goldman fund to pressure Facebook into going public, that outcome probably wouldn’t cause too many at Goldman to start shedding tears.
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