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. Last Updated: 07/27/2016

Facebook Stake an Entry Point for World Market

Digital Sky Technologies founder and CEO Yury Milner on Thursday shrugged off suggestions that his company overpaid for the Facebook stake it bought and said the purchase gives it a foothold outside its home market.

The $200 million it paid for a 1.96 percent stake in Facebook values the company at $10 billion and marks Digital Sky's first major foray in the West. Milner says his investment company applied its experience with social networks in Russia to determine the price to pay.

"The price was suitable," Milner said in a telephone interview from San Diego. "We did substantial due diligence. Globally, there are not that many successful social networks. All our Russian social networks are profitable."

Digital Sky, partly owned by billionaire Alisher Usmanov, has invested in Internet businesses including and local social networks Forticom and Vkontakte. The price it paid for its Facebook stake has rekindled debate about how much social-networking companies are worth. "There is a certain overpayment for the asset," said Sergei Vasin, an analyst at Metropol. "Facebook hasn't yet learned to earn money, and there are delusions in the market about growth potential for these social networks. Digital Sky became a victim of such a delusion."

Facebook put its value at $3.7 billion during negotiations in a legal case, according to a transcript of a court hearing over the company's settlement with ConnectU.

The current valuation is 33 percent less than the $15 billion that Microsoft attached to the company when it made a $240 million investment in 2007. Facebook's lawyers argued at a June hearing that the prices weren't comparable because Microsoft received a different class of shares.

Digital Sky's purchase price has a "very high level of future expectation built into that valuation," said Bob Ackerman, co-founder and managing director at Allegis Capital, a Palo Alto-based venture capital firm. "The fundamental challenge for all of these social network companies is: How do they convert traffic and consumer interest into revenue and earnings? The jury is still out."

Milner maintains that his company paid the right price. "We wanted to get exposure to Facebook's global theme," Milner said Thursday, adding that his Russian experience convinces him that Facebook has the potential to be "one of the most valuable Internet companies globally."

"Facebook's main theme in 2008 and 2009 is aggressive international expansion," he said. "Monetization will follow this expansion and may happen in the next two to three years."

For Digital Sky, the Facebook transaction provides a path into the bigger world of Internet networks, said Anna Kurbatova, an analyst at UniCredit.

The purchase "takes them beyond Russian borders," she said. "This is a long-term investment." The fund may decide to raise its stake "depending on their financial opportunities and ambitions if they see that Facebook's value rises steadily," she said.