How Microsoft Checkmated Facebook
So what is Facebook's destiny?
Microsoft's investment in October 2007 was based on an estimated valuation of $15 billion. If we apply a 15X revenue multiple (higher than that of Google's 11), and let's assume for a moment due to its extraordinarily high monetizing potential (See: " Facebook's Monetization Strategy") to its estimated revenue of $350 million, its optimistic valuation turns out to be $5.25 billion. Based on that, we get an EBITDA multiple of 105, which is much higher than Google's 29. Moreover, we may see Facebook's valuation get a cold shower, given that even Google just missed its earnings because it is finding it difficult to monetize its social networking sites. Even News Corp.'s MySpace, which Google has pledged to support to the tune of $900 million over three years, is having trouble figuring out how to monetize its popularity.
No investment banker in his or her right mind would be willing to take Facebook public at a $15 billion valuation. Facebook could try the same kind of auction-based initial public offering that Google popularized. But investors have to be really stupid to pay this astronomical value for a company that is still in its adolescence with an unproven road map for sustainable revenue and profitability (at that scale).
Would anyone buy the company? Most certainly not at that valuation.
Looks to me like Facebook has been frozen--frozen by Microsoft's brilliant business acumen, and by Zuckerberg's adolescent ego.
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Microsoft must have reasoned like this: "Google must not acquire Facebook. Neither should Yahoo!. Let's play to this kid's ego, and by sprinkling $250 million on the exercise, we can establish an artificially high valuation that would bring their options of exit down to zero."
On the receiving end, 23-year-old Mark Zuckerberg must have been thinking, "I must be a real stud. I've got Microsoft eating out of my hands!" If some adult at the investor table tried to mumble that this valuation may cause problems, he was appropriately silenced by the euphoria of the $15 billion.
Smart indeed.
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