The MBA Oath
Offshoring in the Philippines and China

Facebook -- Goldman Sachs Deal

Facebook Follows the Lead of Enron

So, Goldman Sachs and Facebook want to use the same device championed by Enron -- setting up a special purpose vehicle to pool investor money into one entity and keeping the financial information about that entity off the "sponsors" books. In accounting we call it off-balance-sheet financing. The primary purpose is to avoid disclosing information about the investors and financial dealings of Facebook. The company would transfer stock to as many investors as Goldman could find but it would count as only one investor --  the special purpose entity -- for the $1.5 billion equity offering and avoid SEC oversight by having less than 500 investors. Talk about a lack of transparency. If Facebook were to follow Enron's example it could, at a later date, go to a bank and borrow another $1.5 billion, keep the debt off its books, and then "sell" an unwanted asset to the new special purpose entity in return for the cash. Facebook could even record a gain from the transaction thereby increasing earnings if the cash received from the transfer exceeds the book value of the asset given up. We can characterize this as ethical chutzpah Facebook by financially engineering a transaction to place its legal form over economic substance. It doesn't pass the smell test. 

I looked at the reported numbers in Facebook's offering document that was sent to potential investors. The company's net income in 2009 was $200 million based on $777 million in revenue. That works out to be a return of almost 30% -- much higher than industry standards. Well, it's Facebook so perhaps we should expect such results in the short time the company has been in business. Then again, because it doesn't publicly report financial information I'd like to know what is included in the revenue. Does it conform to accepted accounting standards? Is Facebook trying to remain a private entity to avoid such disclosure and the scrutiny of the SEC and general public?

We don't yet know Facebook's results for 2010 but it has been reported that the company's revenue could be as much as $2 billion. That's almost a 160% increase over 2009! Well, it's Facebook so perhaps we should expect such results that reportedly are largely attributable to advertising growth. The odor is increasing.

I am quite dubious about the Facebook -- Goldman Sachs transaction because we've been there before. Back in the late 1990s and early 2000s we heard about company's such as Lucent Technologies, Sunbeam, Qwest, WorldCom and, off course, Enron that all had one thing in common -- they cooked the books and fooled investors into thinking they were doing a lot better than the true numbers indicated. I hope that's not the case with the Facebook deal for the sake of the investors and our fragile economy. Otherwise, there may be a sequel to the movie, The Social Network -- The Demise of the Social Network!