Whether you’re negotiating a divorce settlement or your company is for sale, the value of your company is critically important. And while there are times that you’re happy with a relatively low value, there are certainly situations when you might ask, “but what about Facebook?”
Facebook is the world’s largest social network, with more than 900 million users. In a highly anticipated and followed Initial Public Offering (IPO) in 2012, Facebook’s implied company valuation approximated $100 billion, making it one of the largest in the history of technology stocks.
But for an industry that prides itself on fundamentals, what did Wall Street anticipate when Facebook opened up at $38 per share? The $38 per share price implied that Facebook was worth 89 times its historical earnings and 76 times its projected earnings, according to Barron’s online. Contrasted with established companies such as Google (14 times projected earnings), Apple (11 times projected earnings) and the NASDAQ and S&P 500 (11 – 15 times earnings), was Facebook valued properly or was it simply a case of irrational exuberance?
Investopedia defines irrational exuberance as “unsustainable investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals.” That term was first coined by then Federal Reserve Board Chairman, Alan Greenspan, in 1996, in reference to the dot-com bubble where companies were going public at large multiples simply due to their status as a technology or e-commerce company. Some of these companies never had profits and in fact, some of them never even had established revenues!
A poster child for this dot.com bubble is Priceline.com. In 1998, Priceline.com’s IPO led to an implied company valuation of $10 billion. Despite the fact that this company consisted of a website, a couple of William Shatner commercials and the ability to lose $3 for every $1 in revenue, Priceline.com was worth more than nearly the entire airline industry!
Over the long-term, the market appears to have the ability to correct itself back to levels supported by underlying fundamentals. Business owners must take heed though, that the fundamentals displayed in the public markets are not the same as those in the private marketplace. In general, there are just too many differences between public and private companies (i.e. access to capital, professional management, size etc.) to extrapolate the public company multiples on to the private company results.
Private Company Valuation Help
To properly determine the value of a private company, it will be necessary to engage the services of a business valuation analyst – one who doesn’t get carried away with irrational exuberance and can help you to know and grow the value of your business. Feel free to contact me via Facebook [$100 billion IPO], LinkedIn [$10.2 billion IPO] or Twitter [~$10 billion IPO] to learn about how a business valuation can help you build business value. Who knows – with the right guidance, your company could be the next Facebook! Contact Rea & Associates to learn more about private company business valuation services.
