Facebook turned five years old this week, but its celebration is clouded by controversy about how much the Internet site is really worth. The conclusion: The popular social-networking site isn't worth anywhere near $15 billion.
In October 2007, when Microsoft invested $240 million to gain a 1.6 percent stake in Facebook as part of an advertising partnership, some analysts equated that to a near $15 billion valuation. Most of the market was skeptical, but Microsoft's investment implied Facebook's stock was worth $35.90 per share.
According to confidential information the Associated Press obtained Wednesday from court documents, Facebook's own appraisal of its privately held stock totaled a mere $8.88 per share. That equates to a market value of about $3.7 billion, still more than Google's $1.65 billion acquisition of YouTube in 2006 and News Corp.'s $580 million acquisition of MySpace in 2005.
The ConnectU Connection
The revelation comes in the wake of Facebook's 2008 settlement with ConnectU. The story dates back to a 2007 lawsuit that claimed Facebook founder Mark Zuckerberg was hired to develop a Web site for two Harvard students.
That Web site was to be called ConnectU, an online social-networking site similar to Facebook. Zuckerberg allegedly promised to keep the plans a secret, but registered the Facebook.com domain name shortly after he began work on the ConnectU project, the court filings indicate.
Brothers Cameron and Tyler Winklevoss and their friend Divya Narenda asked the court to shut down Facebook, give them control of the property, and award them profits from the popular social-networking site. Facebook has about 150 million members. Instead, Facebook settled with ConnectU for $65 million last spring, according to a newsletter leaked by the law firm that represented ConnectU.
What's Facebook Really Worth?
Neither Microsoft nor Facebook was immediately available for comment, but both companies declined comment to the Associated Press on the $3.7 billion valuation. Greg Sterling, principal analyst at Sterling Market Intelligence, called the matter "curious."
"The Microsoft investment suggested this enormous $15 billion valuation. Many people balked at that figure and wondered how it was possible, given the revenues. This $3.7 billion valuation would seem to suggest something more reasonable, even though it's a pretty big valuation," Sterling said. "It also suggests Facebook has all along not seen itself as a $15 billion company."
According to the Associated Press, Facebook's lawyers argued in last June's court hearing that the company's appraisal of its common stock couldn't be used as a direct comparison with the Microsoft investment because the software giant had a strong competitive incentive to pay a premium. A larger valuation would have meant a larger payout to ConnectU.
"Given the lofty valuations ascribed to Facebook, I can see why the ConnectU folks are balking at 'only' $65 million," said Eric Goldman, academic director at the High Tech Law Institute at Santa Clara University. "Either way, the ConnectU folks might get a second 'bonus' payday from Quinn Emanuel for what, on its face, looks like a clear transgression of a lawyer's confidentiality duties to its clients."
From a revenue perspective, analysts have pegged Facebook's sales at between $250 million and $350 million last year. "Facebook is generating revenue, but the revenues are not commiserate with the number of users," Sterling concluded. "There's a big disconnect between the amount of ad revenue it is able to generate and the profile among users."
The true value of Facebook, then, remains undecided.