Goldman, Facebook and pricing psychology
Goldman Sachs this week invested in Facebook at the - some say ridiculous - price of $50 billion. Let's imagine for a moment that the price does not reflect the company's fundamentals. Could it still be rational for Goldman to have done this? We certainly don't associate that particular bank with being taken in by market euphoria. Certainly they will make money by providing services to Facebook and other investors [FT, may require subscription]. But they could probably have got the same deal at a lower valuation if they really wanted to. This article in the New York Times suggests they don't really care if the value's too high, because they will make their money back by exploiting small investors anyway. But they may well care. Indeed, there's a reason they might prefer to pay too much for their stake: it will influence future investors to pay more for the shares. We see in many product markets that the customers don't have any clear idea of the ...
