Facebook valued at $50 billion and other tall tales

May 10, 2011   //   by admin   //   Blog  //  No Comments

When Goldman Sachs effectively valued Facebook at $50bn last Sunday night, it generated a lot of hyped-up news around the world. Is Facebook really worth $50 billion right now? With the benefit of hindsight, let’s look at two other high profile company valuations to see what lessons there are for the would-be investor.

Facebook

Some you win, some you lose

There are two parties to every sale;  the seller and the buyer. We”ll review two separate tales to illustrate both sides of the story.

  1. Losers – the buyers of shares in Telecom Éireann in 1999, and
  2. Winners – Amstrad, (operated by Lord Alan Sugar), when they sold mobile phone company, Dancall, at a massive profit in 1997.

Telecom Éireann

This story shows how hype about a company sale can hugely inflate its valuation. The Irish government sold off the national communications company, Telecom Éireann, in 1999. Almost 600,000 citizens purchased shares following a massive PR campaign, despite not being told the share price until flotation day. In other words, investors did not know how much the company was being valued at when they invested! The share issue was massively oversubscribed. Ordinary investors were encouraged by the government’s guarantee to underwrite the share price for a short period, and the promise of bonus shares if you held onto your shares for one year. However, the share price plummeted, and these ordinary shareholders went on to realise losses of 36% and even higher. Within three years of flotation, company was privatised again, and small shareholders were forced to sell and forced to take losses. There was national outrage in Ireland at the time, culminating in an AGM attended by in excess of 6,000 people that first year. Outrage made no difference, the ordinary shareholders lost a lot of money.

 

Alan Sugar’s Sale of Dancall to Bosh

This story shows how hype about a product can hugely inflate a company’s valuation. This deal was a master stroke by Lord Alan Sugar, and heralded as a “Houdini act” at the time. Dancall was a Danish mobile phone company. Alan Sugar’s company,  Amstrad, sold Dancall to Bosh in 1999 for £92 million. Amstrad had purchased the company for £6 million, and subsequently invested a further £10 million into Dancall. This meant that Alan Sugar brokered a deal which made a profit of £76 million, making a return of almost 6 times the initial investment in a mere three-and-a-half years. That’s a brilliant return by anybody’s standards.
You might wonder what did Dancall do in that three- and-a-half years to merit such a huge increase in the value of the company?
Although the company had developed significant mobile phone technology in that time, this did not account for the gigantic sale valuation. Alan Sugar reveals in his autobiography:
For no other reason other than complete and utter bravado, I blurted out, ‘This company will not be sold by Amstrad unless we are offered at least US$150 million.’
This then became the sale price, (which equated to £92 million at the time.) There were no teams of accountants, bankers and lawyers performing complex calculations. Nope, Alan Sugar just made the price up! This despite the fact that Lord Sugar had consulted world renowned investment bankers, Rothschild, about the company valuation. Rothschild simply deferred to Lord Sugar. Dancall had just launched the first dual-band and dual-standard mobile phone with a lot of PR surrounding the launch. Add in some well-known competitors and advisors and a lot of bravado, and hey- presto, Dancall was sold for a massive profit.

8 Lessons for would-be investors

  1. Hype surrounding a product or company sale can vastly inflate company valuation
  2. Everybody can be wrong sometimes, no matter how experienced, authoritative or well-known they are
  3. There are always losers as well as winners
  4. The price you pay for shares is very important – are they worth it?
  5. Complex valuation calculations can provide comfort about price, but calculations can be wrong and numbers can be manipulated
  6. A company needs to have a product with a competitive edge and a clear strategy for making money to be valuable
  7. Winning is a bonus, and losing is always a possibility
  8. Never invest more than you can afford to lose

Facebook

Is Facebook really worth $50 billion? Well, only a select few, including some clients of Goldman Sachs, have the information that could possibly begin to answer that question. Certainly,  in excess of 500 million non-paying users alone does not justify such a valuation and neither do any number of charts showing how “big” Facebook is.
There is even talk of Bono and the Edge being shareholders already. These chaps have made a lot of money doing what they are good at – music. They have to invest all of that money somewhere. They are no more or less likely to make correct investment decisions than anybody else.
Company valuation and corporate sales have more in common with horse trading than many would care to admit. If and when Facebook does become a publicly quoted company, the market will decide what it’s worth in the long term. In the meantime, we should remember, that big is not always better, at least not when it comes to value.

Have you any investor tips to share or some views on what Facebook is worth to you? Please feel free to make a comment below.

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