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September 24, 2006

Blog 1 - Is Facebook Worth $1 Billion?

It seems that Yahoo is on a fast track to acquiring Facebook, one of the largest networking sites out there. Reports from both The New York Times (click here to read the article) and CNN MONEY (click here to read the article) project that the buyout could entail Yahoo coughing up currency to the tune of about $1 billion. Is Facebook – a social-networking site that does $50 million a year – worth a billion dollars for Yahoo?

When accountants value a company that is being acquired, they make sure to keep in mind that a company’s “goodwill” and “intangible assets” are big portions of the acquisition price. In the case of Facebook, Yahoo should not focus on the $50~$100 million advertising revenue it can bring in. After all, it should take about 30 years for Facebook’s $50 million in annual revenue to yield $1 billion dollars, when discounting for future cash flows. It is the intangibles that Yahoo needs to focus on, when doing the cost-benefit analysis. I have a couple of suggestions:

In addition to these factors, Yahoo should also consider the unique nature of social net-working sites that could generate “extra” benefits. As Richard Dorfman, managing director of Richard Alan Inc., suggests, “What's beautiful about Facebook is that it's a great place to advertise because it generates the equivalent of online word of mouth.” When factoring in such an opportunity with other unique benefits – demographics, growth potential, and the market – and Yahoo seems to have a pretty good deal. If Yahoo has a billion dollars worth of coin to spare, and not have a brilliant $1 billion dollar project plan under its belt, I suggest that Facebook is a pretty good investment.

Posted by willmoon at September 24, 2006 04:09 PM

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