Caveat Emptor, Eh, Microsoft?
Looks like Microsoft’s $240 million equity stake in Facebook hasn’t exactly retained its value. When it was announced in October of 2007, the 1.6 percent stake valued the social network at $35.90 per share, or a stupefying $15 billion. But in a court hearing this past June, held to determine the terms of the company’s settlement with ConnectU–a rival social network that had accused Facebook founder Mark Zuckerberg of lifting its source code and business plan when he worked for it as a programmer–Facebook appraised itself at $8.88 per share. It’s new self-proclaimed market value: $3.7 billion.
Now, the stake Microsoft (MSFT) took in Facebook was in preferred stock, which is inherently more valuable than the common stock on which Facebook’s appraisal was based. That said, it’s doubtful that Microsoft’s shares are loaded up with enough special rights to account for the vast discrepancy between $35.90 per share and $8.88 per share. Remember, Google (GOOG) once purchased five percent of AOL for $1 billion at a company valuation of $20 billion, only to write down $726 million of that investment a few years later.
One last point worth noting here, about the terms of Facebook’s settlement with ConnectU. It was reported earlier this week that the social network had paid ConnectU $65 million to settle the case against it. According to the Associated Press, however, Facebook agreed to pay ConnectU $20 million in cash and 1,253,326 shares of common stock. At the $35.90 per share “Microsoft” valuation, that stock would be worth $45 million. But at the “Facebook” valuation, it’s worth just $11 million. So in Facebook’s view, the company agreed to a $31 million settlement, not a $65 million one.