Llew Claasen
Llew Claasen

The $15-billion Facebook fallacy

I’m amused by the sniggering in the blogosphere at Microsoft collecting the scraps from the Facebook table when it acquired the rights to sell the platform’s remnant advertising worldwide; ie, that inventory that Facebook doesn’t want to sell itself. Others have scowled at the other part of the transaction: the $15-billion valuation attached to Facebook as a result of the 1,6% stake for which Microsoft ostensibly paid $240-million. Insane, baseless, even desperate? Let’s take a deep breath and look at this again.

For a company that has $12-billion in cash (Microsoft), paying $240-million for the Facebook stake will create little more than a rounding error in its financial accounts. The crux of the deal was that Microsoft was not going to let Google get a stake in Facebook if it came down to a bidding war (reference Google’s defensive 5% stake in AOL acquired in December 2005). If Facebook turns out to be a disaster, then Microsoft loses $240-million less the profit on the Facebook inventory sold, which is not going to hurt. If Facebook is the next $200-billion company, then Microsoft is on the bandwagon and Google isn’t.

What Microsoft really did was pay $240-million for the right to prevent Google from benefiting from any direct Facebook advertising deal — and got Facebook to throw in 1,6% in equity and the rights to sell remnant inventory worldwide. If Microsoft paid $240-million for an advertising deal, then it would be recognised as revenue and become taxable in the hands of Facebook, so it makes sense to turn the deal into a capital issue, not a revenue receipt. In any event, what is remnant inventory? How quickly we’ve forgotten about the revenue opportunities in the long tail!

Still don’t believe me that Facebook has not been valued at $15-billion? The advertising inventory deal is set to last until 2011 — 1,6% of Facebook plus an international advertising deal until 2011 has been valued at $240-million by Microsoft. As for Facebook’s view on the matter, shortly after the deal with Microsoft, Facebook was asked what impact the valuation would have on crucial new options issues as Facebook expands its workforce, and it admitted that new options issues would not value Facebook at $15-billion.

No need to run for cover just yet, the bubble’s still intact!