October 27, 2007

A $15 billion toy

In a fit of what seems to me to be utter desparation, Microsoft paid top dollar, $240 million to be precise, for 1.6% of a bit of code which enables jobless people who want to pass their time (not being judgemental here, we need to do it at some point of the day!) fill up gigabytes on the web. The entity in question is Facebook which has become a rage for the range of creative ways to network socially. I spend some time on it every now and then too. But if I knew that what I was fooling around with was a $15 billion toy, I would probably treat every word I typed like I was etching on a diamond. Spoilt brats we all are. Even so the techies at Silicon Valley who think that Moore's law applies to valuations as well.

To get a sense of why I'm so worked up lets do a little analysis here. (by the way $15 billion is Rs.60,000 crore). Bharat Petroleum is a respectable Indian company. Not the one always in the news but still walk the length and breadth of India and you will see petrol pumps, oil storage tanks the sizes of stadiums, refineries, trucks at airports ... in short a huge asset base which you and I can see. The market capitalisation of BPCL at the close of trading yesterday was Rs.13,000 odd crore. Ditto Hindustan Petroleum which at yesterday's close was worth Rs.8,000 odd crore. Siemens India, my previous employer, with concrete orders booked with extremely creditworthy clients over the next few years was worth Rs.29,000 odd crore. My point is that with tangible assets, orders, customers and employees these behemoths of Indian industry are collectively worth Rs.50,000 crore, a wee bit short Rs.10,000 crore or $2.5 billion than Facebook. Something tells me that Facebook might be worth more than the GDP of many
African countries.

My valuations based on yesterdays clsoing market price maybe too simplistic. There is a lot more to cover and account for before I put a number to the companies I have mentioned. But even then you can't pay $240 mn for a wee 1.6% for software you cant see anticipating that an 'x' percentage of the world's population will register, see your ads, click on it and make a purchase. There are too many ifs and buts in Facebooks valuation which if you remember correctly was what caused the tech meltdown 7 years ago.

To be fair to Facebook, it could be the case that the deal is structured. Maybe a significant amount of that equity is mezzanine (which is not the same as the shares traded on the market). Part of it could be a corporate loan and it slipped the Microsoft spokesperson. It could be that the guy typing the Press Release missed the decimal point courtesy some-plants-who-shall-not-be-named. ($1.5 billion is also expensive but given that its the tech industry and they have a history of such fallacies, I'll understand.) Maybe the days to come will throw some more light on the transaction.

I never understood tech. Stood far away from it during my engineering days as well. I guess its an industry I'll never understand and this proves it. I'm much better off funding infrastructure projects, things I can see, touch and feel. I wonder what Warren Buffet would say though? It would be nice to hear him wishing Microsoft all the best!

1 comment:

Clifford Lobo said...

Hey Gordon,

Just had the time (after scanning through the n number of communities on orkut that spoke on the topics i was looking at + a few glimpses that i was intentionally waiting for (some nice legs and....to be straight)

Coming to the topic and not digressing too much from what i wanted to say here. You are absolutely correct on the valuation part of IT companies and their processes. You will get to see a lot of these during mergers and acquisitions of these companies and i am not referring to the method of buying large stakes of the acquired company, etc.