Hadetoleaveitalone: People Making Money Net

Last month, Jim Harbaugh was ready to leave Stanford for Michigan. He’d been in secret talks with Michigan AD Dave Brandon – who, after the embarrassing 37-7 loss to Ohio State, had already made up his mind he was going to fire Rich Rodriguez – and was excited at the prospect of returning to his Alma mater. Peter King and other NFL writers reported Harbaugh was down to the Wolverines or the 49ers on the first weekend of 2011. (I firmly believe Harbaugh led Brandon to believe he was taking the job. Good luck getting anyone to confirm that.) But Stephen Ross entered the picture and blew it all up.

Ross is the Miami Dolphins owner. His estimated net worth is in the $3.4 billion range. He’s such a heavy donor to Michigan that the Business School is named after him.

His Dolphins were thumped on the final day of the regular season (Jan. 2) by the Patriots, 38-7. And even though coach Tony Sparano turned a 1-15 Miami team in 2007 into a playoff team in 2008, he struggled the last two years, going 7-9 (a league-worst 1-7 at home this year). This was Ross’s perfect storm – the Dolphins’ season was a disaster (the QB injuries didn’t help), the hottest coaching prospect in the sport was in town for the Orange Bowl and hey, why not try to money-whip him into coming to South Florida?

And I’m hearing that’s what happened. While Michigan was ready to make Harbaugh one of the highest paid coaches in the country – supposedly in the $3.5-4.5 million range, which would put him in the vicinity of Tressel ($3.8) and Miles ($3.9); the John Clayton figure of $5.2 million seems absurd, but who knows – his eyes lit up the weekend before the Orange Bowl when Ross started to sell him on the big boy money he could make in the pros. (Jason LaCanfora of the NFL Network reported Harbaugh’s clandestine meetings in Miami with Ross, but made no mention of money.)

Pete Carroll money.

Carroll, of course, left USC last year for the Seattle Seahawks, where he’s supposedly making $33 million over five years (for control of football operations). You may recall Harbaugh’s mini-rivalry with Carroll a couple years back – the classic “What’s your deal” moment. Did Ross plant the idea in Harbaugh’s head that he can make $6-6.5 million a year in the NFL? How could Harbaugh not be overwhelmed by this interest from the NFL, where some teams appeared ready to double his $3 million salary?

Michigan was out. And Harbaugh’s Monday night destruction of Virginia Tech only drove up his price tag.

Now the question becomes – is Harbaugh willing to transplant his family 3,000 miles across the country to coach the Dolphins (at perhaps $6.5 million a year) or would he rather take slightly less money (guessing: $5.75 million per?) to keep his family on the West Coast and coach the 49ers? Or does he at the last second say, “well, maybe I want to go to a college town where the winters are brutal and coach my Alma mater for significantly less money than stay on one of the coasts and coach in the sunny weather.” ESPN’s Kirk Herbstreit seems to think that will happen.

With Sunday night's announcement that Goldman Sachs had invested $450 million in Facebook, one could almost hear the supple leather stampede of Ferragamo loafers beating down Lloyd Blankfein's door. After all, with Goldman's rare "special purpose vehicle," its private clients would be able to invest $1.5 billion collectively, without the SEC's oversight, in a social network that Goldman conveniently just inferred was worth $50 billion. And all for the rumored low, low cost of a minimum of $2 million and a promise not to sell until 2013. That is, if clients were willing to do it within the week and without the requisite memorandum explaining the risks.

Such is the magic of Goldman, reasons Fortune contributing editor Duff McDonald. In an article about the five reasons McDonald is not buying Facebook stock — including the troubling facts that (1) no one knows the company's actual financials, and (2) people use it to play backward games like Farmville and Cityville — he also cited Goldman's involvement as a reason to be wary. But we prefer to see McDonald's criticism as yet another reason for Goldman to be proud of being so dang vampire squid about the whole thing. Market manipulation is so baller. We're glad it's making a comeback so early in the new year.

Reuters' Felix Salmon has already pointed out that Goldman's motivation in investing in Facebook is partly to lock down the lead slot as a book runner for when the company does go public. Others have remarked that, depending on the fees that come with Facebook going public, Goldman might pay for its investment on that alone. According to Yipit founder Vinicius Vacanti, when you count them up, Goldman's strategic investments in Facebook actually value the social network closer to $36 billion. McDonald pegs it at $39 billion. Although, of course, it's in Goldman's interest to make everyone think Facebook looks like it's worth $50 billion, which might explain the rush job and lack of private placement memo.

By McDonald's hypothetical math, if Facebook offered the public a chance to buy 20 percent of the company in an IPO, that would be worth $10 billion. Goldman would earn a 2 percent underwriting fee as a book runner on that $10 billion, picking up $200 million. McDonald continues:

Goldman would have to share such spoils, so let's call it $100 million into their pocket. Subtracting that underwriting fee [$100 million] from the Goldman investment [$450 million], and you could easily make the case that for a net purchase price of $350 million, Goldman's ante only values Facebook at $39 billion. Hey, that's just off by $11 billion, so don't worry about it. Buy your shares where you can get them. In other words, go open a $10 million minimum private client account at Goldman Sachs. (Who says Goldman didn't learn its lesson about shafting its own customers? This time around, they've managed to get the customers to line up the shaft themselves.)

C'mon, you don't get to be America's great big bubble machine by expending energy trying to shaft clients. You gotta teach them to do it for themselves. Sorta like "give a man a fish," only, you know, with shafting. By Salmon's reasoning, even if Facebook stays private, Goldman could make out with an even handsomer reward with more private placement deals. "Right now, [Goldman's] in the highly enviable position of having the exclusive ability to parcel out Facebook shares to its own clients, and to make money on pretty much every trade in Facebook shares. That, surely, is more valuable than any one-off IPO fee." The greatest trick the devil ever played was convincing the world that Facebook was definitely worth $50 billion in January 2011? Is Lloyd Blankfein Keyser Söze?

Five reasons why I'm not buying Facebook [Fortune]

Goldman’s Investment Actually Values Facebook At Much Less Than $50 Billion [BI]

Why Facebook won’t go public [Reuters]

Related: Goldman Sachs Investment in Facebook Makes That $50 Billion Valuation Look More Legit

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Thursday, January 6, 2011

People Making Money Net

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