The World's First Phenomenally Forensic Facebook Analysis

By: Reggie Middleton | Thu, Feb 2, 2012
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This Is What You Need Before You Invest, Pt 1

Facebook initial pricing graph

Now that Facebook has actually filed for an IPO, it's time to revisit our previous analyses. BoomBustBlog subscribers are prompted to review our Facebook Forensic Analysis from this time last year - FB note final 01/11/2011. I will probably review the Facebook IPO filing and update my opinions Friday and/or over the weekend to product a part two of this article. I say probably because this is competing for resources with the REIT research that we are doing, namely calculating the likelihood of bankruptcy. Yes, our opinion has been downgraded to the point where we are questioning its ability to remain a going concern. The opportunity actually has options trading on it as well. Alas, in the meantime let's look at how we got to where are now by excerpting my previous opinions and analysis on this deal.

  1. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & It's Still Private! Monday, 03 January 2011

  2. Here's A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure Tuesday, 04 January 2011

    Yesterday, I attempted to pull the wool from some of the more complacent eyes of news media consumers by outlining the potential goals for Goldman's half billion "investment" in Facebook while at the same time pondering the market for a different type of media concern. A media concern that is heavy on the analysis and investigation, yet light on the political correctness and conflicts of interest (see Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!). I definitely don't want to be condescending, but there is obviously (at least to me) a need for such an entity amongst the mainstream rags for as I read through the comment sections of the articles written on the topic, I see such naivete as, "Wow!!! If Goldman is putting their money in this, it must be serious!" I say do myself, "It's a damn shame if that is actually a real person's viewpoint and not a Goldman equity underwriting employee".

    You see, this is not about Goldman's attempt to create capital gains through investment, its about their attempt to create income through commissions, fees and spreads.

Goldman Sachs Powered Facebook Hedge Fund

I would like you, dear reader, to let me know why or why not such a media concern as the one I intimated above should not make as much or more money than Goldman, et. al. and the financial engineering bunch, for the media concern actually imparts useful knowledge that actually adds to society, know? Am I being to idealistic in my search for the Utopian world or is there truly a market for real knowledge and insider info. I'm all ears. Now, back to the topic at hand...

Yeah, I was on a roll last year, wasn't I? That's not the gist of it either, as we reminisce even more...

Here is an excerpt for those who do subscribe to our research and services, YET!

Facebook initial pricing graph

Even with the fund taking 45%+ losses and the LP (limited partners, ex. Goldman's clients) losing every last single dime, Goldman easily pulls a 33% return. God forbid Facebook share actually do well, Goldman's numbers look... Well... Damn near illegal! Almost as if they can pump up a price without any fundamental justification or public disclosure of financials and still sell it retail to the public. Of course, such a thing could and would never occur - not with the every vigilant SEC to take our backs. Excuse me while a cough a up a lung from laughter...

Facebook Projected Returns

You see, this is the dirty little secret of private equity funds. They are not in the business of investing money for client's maximum risk adjusted return. They are in the business of collecting fees. Those poor innocent (or not so, particularly when they are investing their clients monies, hence are in the same business) souls that actually believe as the commenter above quoted "Wow!!! If Goldman is putting their money in this, it must be serious!"simply the lamb being led to the private equity/IPO slaughterhouse. You see, there is no loss to GS - no matter how high they bid up the valuation nor how hard it comes crashing down. This gives them the incentive to shoot for the sky with the private equity deal, because when the IPO breaks, its bonuses bigger than nearly any have ever seen. Facebook makes and excellent marketing story as well. Boy Wunderkind CEO, a product nearly everyone uses and loves, and a mysterious dearth of business model to give it a mystical effect. Don't forget the involvement of the "cream of the crop" of Wall Street banks, whose bankers, traders and analysts are all so much smarter than us guys from Brooklyn. Add this up, and you get "Wow!!! If Goldman is putting their money in this, it must be serious!".

The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman's Facebook Fund Marketing Brochure Into Our Models Thursday, 06 January 2011

This post which clearly demonstrated that this offering was primarily for Goldman's bonus pool integrity and basically a ripoff for clients.

Here's is what the privileged HNW clients get to pay in order to buy the Facebook shares from Goldman with a retail brokerage price markup as opposed from the actual secondary market sites that have popped up...

To get a stake in Facebook, Goldman Sachs clients are required to make a minimum investment of $2 million by Jan. 7 in what's described as limited partnerships based in the Cayman Islands and Delaware. Goldman Sachs is charging 0.5 percent of any capital committed to the partnership as an "expense reserve" as well as a 4 percent placement fee and 5 percent of any gains, according to the document.

Facebook has more than 600 million monthly active users, of whom more than 230 million access the site on mobile devices, the document shows. Statistics available on Facebook's website indicate it has more than 500 million monthly active users and more than 200 million access from mobile devices.

A letter addressed to "potential investor" that introduces the Facebook investment profile ends with a two- sentence paragraph. The first asks potential investors to contact a Goldman Sachs representative for further information. The second says:

"Do not contact Facebook."

Is it me, or is this deal expensive as hell? We are not even taking into consideration the markup on the shares that Goldman is guaranteed to make, which will probably trump all of the numbers above. For those who don't agree with my assertion that this is a RIPOFF tad bit costly, let's plug said numbers into the online private equity model that I made available to subscribers in my last posting on this topic.

Facebook Charts

Basically, 'nuff said.

Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing: Here's What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week! Tuesday, 11 January 2011

Goldman warns, 'We're probably going to dump this load, but we may also need you to remain behind to hold the bag!'

In its offer for the $1.5bn stock sale of privately held social-networking company Facebook, Goldman Sachs disclosed that it might sell or hedge its own $375m investment without warning clients. Under the deal, private wealth-management clients would be subject to "significant restrictions" limiting their ability to sell stakes while Goldman Sachs own holding can be sold or hedged at any time, and without warning. One would hope that astute clients and investors would be put on guard by such conflicting and restrictive liquidity measures! In addition, it appears as if Goldman Sachs failed to disclose its clients that it had offered Facebook shares to its internal investment group, Goldman Sachs Capital Partners, headed by one of its star fund managers, Richard A. Friedman.

Facebook Active Users analysis

Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation - particularly when you consider that Facebook's growth is already slowing!

Facebook: Active users growth

The easy money in Facebook has been made already

Is It Now Common Knowledge That Goldman's Investment Advice Sucks??? Tuesday, 25 January 2011

Bloomberg FrontPage featuring Goldman Sachs article

It's official, the mainstream media has turned on those "doing God's work" and come to the side of BoomBustBlog.

I must admit, I was shocked when I first read this headline and saw the accompanying cover. After all, Bloomberg was the organization that published a story lavishing adulation upon a young Goldman analyst that had a 38% win rate throughout the credit crisis and (faux) recovery. I see those results as mediocre at best, and downright horrible from a realistic perspective. To make matters even worse, I believe I ran circles not only around that analyst, but the entire firm, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? The next thing you know, this heavy nugget of truth is dropped, and all I can say is.... Damn. Let's excerpt some juicy tidbits from Blankfein Flunks Asset Management as Jim Clark Vows No More Goldman Sachs:

On Jan. 2, Jim Clark, a founder of such technology icons as Netscape Communications Corp. and Silicon Graphics Inc., was at home in Palm Beach, Florida, when he got an e-mail from an executive at Goldman Sachs Group Inc.'s private wealth management division. Goldman was offering Clark a chance to invest in the closely held social-networking company FacebookInc. The deal -- through a fund overseen by Goldman Sachs Asset Management -- was being offered to other Goldman investors at the same time, Bloomberg Markets magazine reports in its March issue.

The firm would levy a 4 percent placement fee on clients, plus a half percent "expense reserve" fee. It would also require investors to surrender 5 percent of any profits, known as "carried interest," according to a Goldman Sachs document.

Clark turned Goldman down. In June, 2009, he had yanked most of the roughly $400 million he had invested with the firm due to what he considered bad advice and poor performance, including a big hit from GSAM's Global Alpha hedge fund. This offer, he says, just irked him further. A few months earlier, he had purchased a stake in Facebook through another firm for a lower price, he says, and without the onerous carried interest.

"I don't think it's reasonable," Clark says. "It's just another way for them to make money from their clients."

Jim Clark is a smart man, and I don't think he needs me to assure him of that. For those who may not be as hip to fees and valuations, I published The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman's Facebook Fund Marketing Brochure Into Our Models which clearly demonstrated that this offering was primarily for Goldman's bonus pool integrity and basically a ripoff for clients. In the following post, I declared "Here's A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure"

Did Blogs Exercise Enough Influence To Alter Goldman's Facebook Plans Or Did The SEC Decide To Get Serious?

After hearing of Goldman's plans to allow investors to skirt SEC guidelines and issue private shares of Facebook to the public, I had a plethora of warnings and admonitions. Once I (and my best analyst) took the time to parse the numbers and the logic behind the deal, I concluded that Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman's Pricing: Here's What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!

In a nutshell, not only is the offering unlawful on its face (although probably lawful due to the financial engineering cum law splicing from the wizards at Goldman), the valuations were simply stuff of fairy tails and dot.com implosions.

I offered a detailed and illustrative valuation exercise to the professional/institutional (read as, HNW) blog subscribers ( FB note final) and as was usual included a material dollpp for the public blog to chew on. I think many found it quite the engaging read, at the very least.

Well, it appears as if maybe someone at the SEC may have gotten pissed off enough to say "I've had it and I'm not going to take anymore!!!!" From the Wall Street Journal: Goldman to Exclude U.S. Clients From Facebook Deal...

For some background into my work on Facebook's offering, go to 13:55 in the video to see me discussing Goldman's Facebook offering that never was.

 

The next installment in this series will incorporate what I've found in the most recent FB IPO filing, and parse that through BoomBustBlog analytics for my subscribers, with the usual smart ass, opinionated commentary for the free blog readers as well.

 


 

Reggie Middleton

Author: Reggie Middleton

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Reggie Middleton

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

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