Goldman Facebook coup embarrasses rest of Wall St

The firms near $2 billion investment hook-up with Facebook is relatively small beans financially,but its a big win in franchise terms.

Goldman Sachs rivals must be kicking themselves. The firms near $2 billion investment hook-up with Facebook is relatively small beans financially,but its a big win in franchise terms. After the lumps Goldman took last year,the deal shows the firm can still lead the way wrapping its tentacles around a key client for mutual benefit.

Goldman could still lose money on the deal for its shareholders,partners and clients. And questions remain as to whether its plan to invest $450 million of its own capital alongside $1.5 billion from others through a single investment entity violates the spirit of Securities Exchange Act disclosure rules. That means theres still a chance the high-profile deal could backfire financially or in the realm of public opinion.

But taking calculated risks is what separates Goldman from run-of-the-mill competitors. The Facebook effort also involved stitching its sometimes conflicting strands of business into a fabric that suited a top priority customer. Thats a way both to fend off rivals and to mitigate the risk in the deal.

Story continues below this ad

The Goldman coup surely started with an investment banking relationship with Facebooks executives and its board,including early venture capital supporters Peter Thiel and Jim Breyer.

But other banks can do that. So something more was required: capital. Even without the backing of some of its in-house money managers,Goldman found the cash. Chief Executive Lloyd Blankfein carved out a slice of the balance sheet a bold call given that many bank executives are paralyzed trying to figure out the impact of regulatory changes on proprietary investments.

Moreover,Goldmans Silicon Valley bankers enlisted the private wealth management division to bring in the banks customers as investors. That doesnt just generate fees it allows Goldman to boast that it brings clients deals other banks cant match. The firms powerful network of alumni also played a role. Digital Sky Technologies,a Facebook shareholder thats investing at least $50 million more,counts former partners of the bank among its executives.

There are other tentacles standing by for the future,too. Goldman will probably take Facebook public eventually,for a juicy fee. And its private bank may be able to grab the founders and employees when that happens. The likes of Morgan Stanley and Credit Suisse should be wondering whether and how they can coordinate their various appendages so successfully.