The relationship between Goldman Sachs and Facebook is “frayed,” after Goldman’s decision to cancel its private-placement for Facebook for US clients, says Andrew Ross Sorkin of the New York Times.
People familiar with Goldman’s and Facebook’s view of the situation dispute this characterization.
Rather, say these people, both Facebook and Goldman are unhappy and frustrated at the outcome of the US deal, but do not necessarily blame each other for what happened.
Now, of course, one person’s “frayed” is another person’s “frustrated,” so it’s worth taking a look at what really happened.
According to the people familiar with the situation, that’s this:
US laws for private-placements prohibit excessive marketing or advertising around private transactions, on the theory that such publicity could affect the decision-making of potential investors. (Whether the folks who invest in such private-placements need such protection is another issue–arguably, they don’t. Steven Davidoff has a good analysis of the relevant laws here).
Goldman and Facebook obviously expected that the Facebook transaction would generate significant publicity. What they did not anticipate, says a person familiar with Goldman’s view of the situation, was the amount of the publicity and the amount of inaccurate information that would be reported. They also did not expect news of the transaction to leak as early as it did.
The media coverage of the Facebook deal eventually included details that were either taken out of context or were inaccurate, says the person familiar with Goldman’s view of situation–including some financial details and the frequent assertion that the deal had closed or was about to close when in fact it had not. When these media reports appeared, US securities laws prevented Goldman from even acknowledging that a private transaction was taking place, let alone that some of the information being reported about it was wrong. Thus, Goldman was unable to correct inaccurate information in the marketplace. And this inaccurate information, hypothetically, might arguably have influenced a potential investor’s decision-making.
Importantly, says the person familiar with Goldman’s view of the situation, if US regulators decided to bring a case against Goldman for violating the marketing-and-advertising rules, they would not need to prove that Goldman or Facebook were responsible for creating the publicity surrounding the transaction. Rather, they would merely need to prove that the publicity might have affected an investor’s decision-making.
As the marketing of the transaction progressed, this person says, Goldman’s legal team eventually concluded that, if the SEC were to bring a case against it for violating the marketing-and-advertising rules, Goldman could not be certain that it would win.
So Goldman cancelled the US offering and decided to only sell the deal internationally, where Goldman had plenty of demand for Facebook stock and where the rules governing private-placements are less stringent.
Now, should this failure to execute the US deal be viewed as a major embarrassment for Goldman? Did Goldman botch the deal? Should Goldman’s relationship with Facebook be “frayed”?
The answer to those questions comes down to whether Goldman should have known at the outset that a $1.5 billion private-placement for Facebook at a $50 billion valuation would generate massive amounts of publicity during the marketing process (including, potentially, inaccurate information that Goldman would not be able to correct). If the answer to that question is “yes,” Goldman should have concluded at the beginning of the process that completing the transaction successfully would basically be impossible under US securities laws–and, therefore, screwed its client and “botched” the deal.
You be the judge.
In any event, the people familiar with Goldman’s and Facebook’s view of the situation do not feel that the Goldman-Facebook relationship is “frayed.” They just regard both sides as “frustrated.”
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