ft.com/gapperblog

The news that Microsoft is negotiating to take a 5 per cent stake in Facebook is intriguing for various reasons. One is that Facebook would acquire a valuation of about $10bn without Mark Zuckerberg, its independent-minded founder having to sacrifice control.

One of the attractions of a deal for Facebook must be it sets a target price if and when it eventually sells out entirely. And the practice of companies getting valuations based on minority stakes is common in the venture capital world; that is how they get valued during various rounds of fund-raising.

But it is clearly open to abuse. I could offer Facebook $1 for so miniscule a slice of equity that it would acquire a implied value of $100bn or even $1,000bn in the transaction. It would not cost me much and it would (if anyone took it seriously) benefit Facebook a lot.   

This case is less extreme but, even so, $300m to $500m is not much money for Microsoft. Maybe the lesson is that all valuations in illiquid markets should be treated with suspicion, something that a few investors in mortgage-backed securities have learned.

September 25th, 2007 in Finance | Permalink