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Facebook's value climbs as private trading in the firm surges

Investors are scrambling for a piece of the social networking site before it goes public, pushing up its value to $42 billion. But that interest is creating concern at the firm and possibly the SEC.

December 29, 2010|By Jessica Guynn, Los Angeles Times
  • Facebook founder Mark Zuckerberg, shown delivering an address in San Francisco, has said he is not eager to take his company public.
Facebook founder Mark Zuckerberg, shown delivering an address in San Francisco,… (Marcio Jose Sanchez, Associated…)

Reporting from San Francisco — Facebook Inc. has tripled in value in the last 12 months to $42 billion as private trading in the company has surged.

Investors are scrambling to get a piece of companies taking part in the social networking boom such as Twitter Inc., Zynga Inc. and LinkedIn Corp., driving valuations to sky-high levels. The combined value of the top 11 privately held venture-backed technology businesses has risen 54% since June, according to a study from Nyppex, a brokerage firm that facilitates trading in private companies.

Facebook's latest valuation, according to trading on SharesPost Inc., an online marketplace that trades in shares of private companies, is greater than that for Internet giants EBay Inc. or Yahoo Inc.

"Over the years people have paid premiums for the companies best positioned for long-term growth and margin expansion. For good reason, Facebook is perceived of as one of those companies," Standard & Poor's analyst Scott Kessler said. "Whether or not at this point in its life cycle it deserves to demand a valuation that essentially makes it the second- or third-most valuable Internet company on the planet is an open question."

SharesPost in San Bruno, Calif., and SecondMarket in New York are among a handful of private stock exchanges that have sprung up to help wealthy and institutional investors trade stock in start-ups without having to wait for an initial public offering that could be months or years away. Former employees and early-stage venture capitalists sell stock on the exchanges.

The surge in trading activity has reportedly drawn the scrutiny of the Securities and Exchange Commission, which has sent information requests to some of the participants in part to understand how many new Facebook shareholders the trading has created.

The move raises thorny issues for Facebook, the most actively traded technology company on the private markets. It wants to keep the number of its shareholders under 500 to avoid having to disclose financial information to prospective investors. Federal law limits private companies to fewer than 500 shareholders. Once a company reaches that threshold, it must register its private shares with the SEC.

"There is no question that the SEC is going to be concerned by the fact that you have a private company that makes no financial disclosures and yet has a relatively large trading volume," UC Berkeley law professor Robert Bartlett said. "The SEC may push Facebook as much as it has the authority to do so to become a public company."

The SEC declined to comment.

Highflying Internet companies used to jump at the chance to cash out in the public markets. These days, Facebook and others are in no rush, and are instead raising large investments to stay private longer to avoid the burdens of being a public company. The sluggish IPO market isn't helping.

Investors say they are speculating on these companies' long-term prospects, not their actual value. They are betting their stakes will turn into stock market gold when these companies go public, on par with Google Inc.'s initial public offering in 2004 that made early employees and investors rich.

"These companies are like first-round draft picks," BGC Partners analyst Colin Gillis said. "There's a lot of excitement around them to see if they can grow into their potential."

Well-known venture capitalist John Doerr of Kleiner, Perkins, Caufield & Byers predicted during the Web 2.0 Summit in November that this new wave of Internet companies would be worth more than what investors are paying for them now. Kleiner Perkins recently led a $200-million investment in Twitter that valued the San Francisco Internet company at $3.7 billion. Kleiner Perkins, which missed out on Facebook and other social media companies to invest in so-called green technology is playing catch-up with its investments in Twitter and Zynga.

"There were major institutional investors who passed on Google at the IPO," TCW Group media analyst Anthony Valencia said. "Investors are believers now that these stocks can make money and do well. They are saying, 'These are the stocks of this century and I am not going to miss out.'"

But such investments can carry substantial risk. Analysts point to MySpace, the once-soaring News Corp. social networking site that has plunged in value.

"Without any financial statements, it's somewhat a leap of faith," Valencia said. "But these markets are huge, and investors who in the past didn't take a leap of faith were often disappointed."

The private trading volume in technology companies is still small compared with trading on public exchanges such as the New York Stock Exchange and Nasdaq.

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