Bloomberg News

T. Rowe Owning Facebook Shares Bets This Will Be Different

February 09, 2012

(Updates with closing stock prices in 12th paragraph.)

Feb. 2 (Bloomberg) -- T. Rowe Price Group Inc. has posted a profit every quarter since going public in 1986, in part because the firm sat out the dot-com boom in the 1990s and scaled back mortgage holdings before the housing collapse.

As Facebook Inc. prepares what may become the biggest IPO ever by an Internet company, the Baltimore-based asset manager is betting this time is different. T. Rowe holds the biggest stake of any mutual-fund company in Facebook, the world’s largest social-networking service. It is also among the main holders of Zynga Inc., Angie’s List Inc. and LinkedIn Corp., all public companies, and has put money into Twitter Inc. and LivingSocial.com, which are closely held.

T. Rowe, which manages $490 billion, mostly in equities, is telling investors that Internet companies are more mature now than during the 1990s, when companies with no earnings prospects went public. The current Web companies have greater potential and are further along in their development, T. Rowe Price said in a report to shareholders last year titled “A New Era of Internet Investing.”

“They didn’t get caught up in the hype of the dot-com world, but they seem to be saying they see value in some of these new companies,” Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in a telephone interview.

T. Rowe Price owns 5.2 percent of Facebook’s Class A shares, making it the only mutual-fund manager with a stake of more than 5 percent, according to the registration statement filed by the Menlo Park, California-based social-networking website yesterday. The firm owns 6 million Class A shares and 12.2 million Class B shares.

‘Substantial Amount’

T. Rowe Price’s own documents show that its mutual funds held Facebook shares valued at $408 million at the end of 2011, Robert Benjamin, a company spokesman, said in an e-mail. The company owns a “a substantial amount” of additional Facebook shares in other accounts for clients, Benjamin said.

Facebook filed to raise $5 billion in what would be the largest Internet IPO on record. The amount is a placeholder used to calculate fees and may change.

Facebook is considering a valuation of $75 billion to $100 billion, two people with knowledge of the matter said last week. At the high end of the range, that would value Facebook at 26.9 times trailing 12-month sales, more than double Google Inc.’s valuation when the search-engine operator went public in 2004.

Controlling Risk

Heather McDonold, a spokeswoman for T. Rowe, declined to comment on Facebook and the firm’s other Internet investments. The company, she said, is managing risk by keeping the investments small as a percentage of its funds.

“Except in a couple of instances, no single investment currently represents more than 1 percent of any fund,” she wrote.

The company owns 15 percent of the Class A shares of LinkedIn, according to data compiled by Bloomberg. It is the third-largest holder of San Francisco-based Zynga, with a 12 percent stake, and among the top four owners of Indianapolis- based Angie’s List with a 12 percent holding. T. Rowe also has a 0.3 percent stake in Chicago-based Groupon Inc.

Internet and social media stocks rose today after Facebook filed its IPO. As the close of New York trading, Zynga had gained 24 percent since the company’s own IPO; Angie’s List was up 13 percent; LinkedIn had climbed 71 percent; and Groupon had risen 15 percent.

‘No Guarantee’

T. Rowe Price invested in Zynga, Angie’s List and Chicago- based Groupon before their 2011 IPOs, McDonold said, declining to give a price. T. Rowe Price bought LinkedIn after the company went public, McDonold said.

Traditionally, making an investment in a company before its IPO was a good way to make a lot of money, said Tom Taulli, whose Los Angeles-based website, IPOPlaybook.com, analyzes IPOs. More recently, he said, private market valuations have been so high “that getting in early is no guarantee that you will make money,” he said.

Twitter, based in San Francisco, raised $100 million in September 2009 in a venture capital round that included T. Rowe Price. SkyNews reported in July that the firm was set to pay about $90 million for an added Twitter stake, citing people familiar with the situation.

LivingSocial.com, based in Washington, has received a total of $1.03 billion from investors including T. Rowe Price.

Fidelity Investments, whose funds can invest in a limited amount of illiquid assets, typically acquires non-traded shares directly from the issuer because it can negotiate certain rights with the purchase, said Kristina Salen, global sector leader for media, Internet and telecommunications at the Boston-based firm.

Researching Companies

Salen declined to comment on Fidelity’s Facebook holdings and how the firm acquired them.

Salen said relationships with private firms grow out of connections Fidelity analysts build while researching companies in their industries.

“We spend a lot of time with private companies,” she said in a telephone interview. “It doesn’t necessarily mean we will invest in them.”

T. Rowe Price was viewed as out of step with the times for its refusal to embrace the dot-com boom in the 1990s, Kunal Kapoor, an analyst for Chicago-based Morningstar Inc., wrote in a 2004 note.

“The rest, of course, is history,” Kapoor wrote. “The market tumbled, T. Rowe’s conservatism protected its investors.”

Conservative Investors

The technology-heavy Nasdaq Composite Index lost 66 percent of its value between June 30, 2000 and Dec. 31, 2002, according to data compiled by Bloomberg. T. Rowe Price’s shares fell 33 percent over the same stretch, including reinvested dividends. Denver-based Janus Capital Group Inc., which had a reputation for more aggressive investing, dropped 70 percent.

“T. Rowe came out of that bear market in pretty good shape because of their conservative nature,” Russel Kinnel, director of mutual-fund research at Morningstar, said in a telephone interview.

The success of the new generation of tech companies is fulfilling the early promises of the Internet, Robert Sharps, a portfolio manager at T. Rowe Price, said in the firm’s April newsletter.

“What we are seeing now is what fueled much of the optimism and ultimately much of the speculation in the 1990s,” he said.

In its newsletter this January, the firm identified Internet software and service, mobile and cloud-computing companies as areas of focus for its portfolio managers.

Google, Amazon.com

T. Rowe Price is the third-largest holder of Mountain View, California-based Google Inc., the fourth-largest holder of Seattle-based Amazon.com Inc. and one of the biggest in Cupertino, California-based Apple Inc. The three technology stocks represented the firm’s largest positions as of Sept. 30, data compiled by Bloomberg show.

T. Rowe Price shares have risen 1.6 percent this year. In the 25 years ended Dec. 31, they returned 20 percent a year with dividends, more than double the performance of the Standard & Poor’s 500 Index.

--With assistance from Sree Vidya Bhaktavatsalam and Christopher Condon in Boston and Elizabeth Ody in New York. Editors: Christian Baumgaertel, Josh Friedman

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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