Dealbreaker proffers an example tending towards the view that tech valuations have gone bonkers again. (Or that they never fully pulled back into "unbonkers"). Of course, I am highly suspicious of valuations that don't get at or as close as possible to "intrinsic value" where that is possible. What's the point if you don't have some kind of ballpark on what the business is capable of. Ironically, a few readers have emailed me to critique my view of models, their importance and the relationship between modeling and actually operating a business. I thought some actual statistics on the last two weeks of emails might be interesting.
Readers who indicated:
Equity Private is far too concerned with models: 3
Equity Private is not concerned enough with models: 3
Equity Private's models are not nearly robust enough: 2
Equity Private's models are over-engineered: 4
Equity Private would, in the fullness of time, come to understand how useless models are: 2
Discounted cash flow analysis is important: 4
Discounted cash flow analysis is useless: 3
Project Sinister employees are total idiots for not taking the bonus deferral: 5
Project Sinister employees are geniuses for not taking the bonus deferral: 3
Project Sinister employees are thieving villains who are at this very moment days if not hours away from smashing the drywall to salvage the copper in the Project Sinister offices: 1
Personally, I think the place of models is to introduce just a hint of rationality to what is otherwise a highly subjective analysis. You have to take them with a grain of salt, to be sure, since their only value is predictive. But herein lies the hitch. When you both take models too seriously and start to impose "creative thinking" about how to model a firm, well then you get rather silly results. This brings me back to the Dealbreaker entry:
It is the new, new economy, apparently. Dealbreaker, quoting "Reporter Michael Idov" continues:
It’s nearly impossible to apply the usual valuation formulas to DailyCandy. According to the Wall Street Journal, the company projects revenue of “somewhere less than $20 million” this year. Most successful businesses go on sale valued at least ten times their yearly revenue, so by this standard, DailyCandy should cost $200 million or more.
Mr. Idov has given me some wonderful ideas:
General Electric trailing twelve months of revenue: $144.4 billion.
GE market cap (April 24, 2006): $358.8 billion.
Control premium for acquisition of GE (2005 average): 30%
Optimism factor applied to control premium: 20%
Resulting control premium: 36%
Theoretical acquisition cost of GE with control premium: $487.9 billion.
Cost of restructuring GE to an "internet focused firm": 15% of enterprise value.
Restructuring time frame: 1 year.
Dollar cost of restructuring: $53.8 billion.
Total cost of GE acquisition and restructuring: $541.72 billion.
Potential sale price via "Idov Valuation Methodology" (patent pending): $1,444
trillion billion. (Fortunately, I have eager Harvard beaver "LK" to correct my typos!)
Gains from sale net theoretical debt: $902.3 billion.
Time period: 1 year.
IRR on transaction: 66.56%
Cash on Cash: 1.67x
Really, as soon as people start getting creative with valuation metrics ($ per annual clicks, $ per "eye pairs," $ per paper-clips purchases) just stop listening. It is not as if revenue multiples are even a decent way to look at things. They just aren't.