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Sunday, 5 February 2012
Vincent Tan: How I made a fortune from Facebook
For a man who does not have a Facebook account, Tan Sri Vincent Tan surely knows the value of the Internet giant.
“I may have one later,” quips Tan on opening an account but he will be counting the windfall from the 3.5 million shares his company, MOL Global Bhd, owns in Facebook once the company is listed on either the New York Stock Exchange or Nasdaq.
Based on an assumption that Facebook shares start trading at US$40 post-initial public offering, Tan’s MOL Global stands to pocket RM420mil for its shares.
Speaking to StarBizWeek, Tan recollects how he came about getting his hands on a tiny but valuable stake in Facebook.
Friendster was among the first social networking websites. It preceded MySpace and Facebook. Starting operations in 2003, Friendster found the going tough and lost money for years.
The company continued to raise but spent money aggressively. In running up losses, Friendster had, nonetheless, built up a base of 140 million registered users, of which 40 million were active.
Tan said the losses then stemmed from Friendster not monetising its user base. Finding it hard to make money from its users, it was losing an average of US$10mil a year.
Eventually, the patience of the owners and investors in Friendster wore thin and they wanted to exit the business. Friendster then called for a process to sell the business and now Friendster CEO, Ganesh Kumar Bangah, who was then working with Tan, informed him that Friendster was for sale.
“I asked for the numbers and found that 140 million registered users and 40 million active users was interesting. If we could make them spend some money, maybe Friendster would be a good investment. Of course, the downside was the business will continue to lose US$10mil a year,” he said.
Tan said the owners of Friendster initially wanted US$100mil for the business but with losses mounting, he knew no one would pay that much for the company. “At that time, Facebook wanted to buy Friendster’s patents but Facebook was willing to pay US$10mil cash and later increased it to US$20mil cash.”
Tan was made to understand then that the owners felt that taking US$20mil only to lose US$10mil a year will soon see that cash vanish and then decided to accept US$40mil for Friendster but wanted a quick sale. “They gave the potential buyers about a week to decide. Many people were looking, including large firms from China and Japan, at Friendster.
“They were much larger than MOL but with the owners of Friendster needing a fast sale, I told Ganesh to do a quick due diligence on Friendster.
“We took two days for the due diligence and made a bid. We said since Friendster owed people US$2mil, we offered US$38mil.
“With other potential buyers doing their due diligence, I told them that if they accepted US$38mil, we will do the deal right away. They accepted our proposal,” said Tan.
After buying Friendster in 2008, Tan then turned his attention to Facebook, which remained interested in Friendster’s patents and whose offer of US$20mil cash for the technology rights was still on the table. “We had a conference call with the people at Facebook. I accepted their price but I wanted shares.”
Facebook officials told him that Mark Zuckerberg, the boss of Facebook, did not want to dilute the shares in the company but Tan stood firm and said “if there was no shares, forget it”.
Tan insisted on getting shares in Facebook because he felt the company will be big in the future. Finally, Zuckerberg agreed to a share exchange for the patents and Tan got his 700,000 shares. His shares have grown to 3.5 million following a 5-for-1 split in Facebook’s shares before the IPO process.
Tan did not leave Friendster to languish but devised a plan to get the social networking website to breakeven point. He closed the US, Singapore and Australia offices to cut cost and began rebuilding the company.
This year, Friendster has stopped the bleeding and Tan felt the company has become “quite valuable”.
“The number of active users on Friendster has fallen from 40 million to four million but these four million spend money with us. We put games and all kind of things on the website and they spend money. If they didn’t, we cannot monetise the business,” he said.
Potentially, Tan values his Internet business at around RM1bil. It does business in Malaysia, Singapore, Thailand, the Philippines, Indonesia and India and is trying to get into Vietnam and many other countries.
MOL makes money from points people buy to play online games. It is also a payments gateway and is a payment partner for Facebook and Zynga, which is the creator of the hugely popular Farmville.
Tan said business models employed by companies such as Zynga, instead of relying on advertising revenue, was how large sums of money can be made from the Internet.
“People play and buy cows and tractors for their game. It’s amazing why people pay so much for that and I cannot imagine it.
“I tell my kids ‘you don’t play Farmville. If you want to farm, you can go to Bukit Tinggi. I will give you a real farm’,” he laughs.
Will he hold or sell his Facebook shares?
“We will see where it goes,” said Tan. “We will probably sell them for our business. We don’t want to hold them for too long but will see where the shares go after the IPO.”
At any price, the Facebook shares Tan owns has been hugely rewarding and the profit from the shares means the Friendster acquisition was paid for plus a lot extra profit on the side. “We were lucky,” he said.
So where does this investment rank among the many that Tan has executed in his corporate life?
“It’s one of the good ones but none can beat DiGi,” he said. “DiGi was my best investment and I should have stayed with it. I sold when DiGi had a market capitalisation of RM5bil to RM6bil. Today, the company is worth some RM31bil.