One of the life lessons I learned as a junior investment banker was, "There are no shortcuts." A corollary to this lesson was, "If it looks too good to be true, it is." These lessons were learned in the late night hours, when I was tired, wanted sleep. If I cut corners and breezed by possible project complications in order to hasten my speed home to bed, inevitably I lost, rather than gained, time and sleep.
On Monday Goldman Sachs announced that they will no longer be offering U.S.-based investors the opportunity to purchase shares in the $1.5 billion private placement they are running on behalf of Facebook. The announcement brought these two lessons to mind.
In fact, I wanted to shake Lloyd Blankfein and Mark Zuckerberg both by the shoulders—and their lead attorneys too—and ask, “What are you thinking?” There is so much about this deal that seems crazy to me. That Goldman is jury rigging it before it even closes is unsurprising. And not a good sign.
On the Goldman side of the equation there is risk. Steven Davidoff writes in the NY Times’ Dealbook that Goldman’s decision to make the offering available only to non-US entities was simple regulatory risk management. Perhaps. But the business risk to Goldman in this deal is hair-raising. And with this turn of events, only amplified.
And on the Facebook side there is, as always, hubris, an apparent attempt to circumvent regulatory reporting requirements for as long as possible, while bringing in the maximum amount of cash and giving the minimum amount away.
Admittedly Goldman is a master of managing risk, but the firm seems worn down, tired, even a little bit desperate. It may be no match for Facebook’s new-new hubris. Rather than tapping institutional investors for the $1.5 billion, Goldman agreed to put its substantial, highly-prized high net worth client network in play for the deal.
There are multiple possible explanations for this decision. The $950 million Groupon transaction completed last week was the largest fund-driven start-up deal since DreamWorks raised money 15 years ago. Pulling off a transaction a week or two later that is half again as big would be a feat. But it’s Goldman. Goldman is capable of feats. John Cassidy speculates in The New Yorker that institutional investors wouldn’t have tolerated the deal’s $50 billion valuation. I don’t buy that explanation, but maybe it’s true. And maybe the Facebook team didn’t want any more institutional oversight.
Whatever the reason, Goldman, Facebook and their attorneys opted to take the private client route to $1.5 billion, thereby complicating the transaction enormously. And increase complications always equal increased risk. "There are no shortcuts."
This decision introduced the need for a work around for the SEC's 500 investor threshold to staying private—a Special Purpose Vehicle. It increased the possibility of close SEC oversight of a deal that was by definition going to draw heavy public interest—how could it not? And—most importantly to Goldman--it introduced the need for an extremely sensitive global relationship management exercise with one of its most valuable, high-maintenance client groups.
With Monday’s turn of events Goldman revealed that it had already stumbled badly, looking disorganized, unaware, likely alienating the US portion of that client group. And now, non-US investors are left single-handedly holding the bag, if for any reason this deal doesn’t play out as expected. Individual wealth is at play.
This is a different dynamic than the one associated with institutional investors taking a hit--or shares in a publicly traded company dropping 12 months after a public offering. And the importance of these particular relationships to Goldman can't be underestimated. Clients hail from the exact markets in which it is focused on growing its business. They are the CEOs and the power brokers in those countries. Goldman needs this deal to work.
When commentators and industry insiders say, "This time is different." when the topic of a bubble comes up, it’s time to take a measured assessment of the landscape. In December 1999, just prior to its merger with Time Warner, Aol, a profitable company with experienced management on board, had a market capitalization of $75 billion on revenues of just under $5 billion. Analysts projected revenues of $27 billion by 2004. Today, free again of Time Warner, Aol’s market capitalization is $2.5 billion. Revenues hover around $3.5 billion.
I hope this time is different. But, "If it looks too good to be true, it is." keeps ringing in my ears.