How Friendster profited from Facebook

Published February 8, 2012 2:11pm

Who would have thought an "old" social network pushed aside by online social darling Facebook can still make money off the networking juggernaut?

Tan Sri Vincent Tan expects his company MOL Global Bhd —which bought Friendster in 2008— to gain from 3.5 million Facebook shares it acquired in a patent deal.

MOL Global stands to get RM420 million (P5.927 billion) for its shares if Facebook shares start trading at $40 post-initial public offering, according to a report on Malaysia's The Star newspaper.

Friendster, which was among the first social networking websites, started out in 2003, coming before MySpace and Facebook.

But it lost money for years after encountering hard times, losing an average of $10 million a year, The Star report said.

Despite this, it still has a base of 140 million registered users, 40 million of whom are active.

In contrast, Facebook is expected to be listed on either the New York Stock Exchange or Nasdaq as it goes public.

Getting a stake in Facebook

Present Friendster CEO, Ganesh Kumar Bangah, who was then working with Tan, informed Tan 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 $10 million a year,” he said.

But Tan said Friendster's owners initially wanted $100 million - a price he deemed too high given its mounting losses.

On the other hand, he noted that at the time, Facebook wanted to buy Friendster’s patents but Facebook was willing to pay $10 million cash and later increased this to $20 million cash.

Tan said the owners may have felt taking $20 million while continuing to lose $10 million a year may wipe out any gain, and decided to accept $40 million 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," he said.

He said his company took two days for the due diligence and made a bid. He said that since Friendster owed people $2 million, "we offered $38 million."

“With other potential buyers doing their due diligence, I told them that if they accepted $38 million, we will do the deal right away. They accepted our proposal,” said Tan.

After buying Friendster in 2008, Tan turned his attention to Facebook, which was still interested in Friendster’s patents and whose $20-million offer 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,” he said.

When told that Facebook CEO Mark Zuckerberg did not want to dilute Facebook's shares, Tan stood his ground.

“If there was no shares, forget it,” he said. Zuckerberg agreed to a share exchange for the patents and Tan got his 700,000 shares, which grew to 3.5 million following a 5-for-1 split in Facebook’s shares before the IPO process.

Breaking even, gaming revenues

To get Friendster to a break-even point, Tan closed the US, Singapore and Australia offices to cut cost and began rebuilding the company.

Friendster has stopped the bleeding this year, 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 monetize the business,” he said.

Tan values his Internet business at around potentially RM1 billion.

It does business in Malaysia, Singapore, Thailand, the Philippines, Indonesia and India and is trying to get into Vietnam and 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, creator of the popular "Farmville" game.

To hold or to sell?

“We will see where it goes. 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,” Tan said when asked if he would sell or hold on to his Facebook shares.

He considered his firm "lucky" for the extra profits from the Friendster and Facebook transactions.

When asked how he would rank this transaction in his corporate life, he said this was "one of the good ones."

However, he admitted DiGi was his best investment and he should have stayed with it.

But he sold when DiGi had a market capitalisation of RM5 to RM6 billion. Today, the company is worth some RM31 billion.

“That’s the big one that got away,” he said. — TJD, GMA News

Tags: socialmedia, facebook, friendster, stocks