5 ms·

In 2013 Dell was taken private with one really big check for ~25B. I don't know off the top of my head what the earnings multiple was on that deal, but I know t

by harryh 6y ago

In 2013 Dell was taken private with one really big check for ~25B. I don't know off the top of my head what the earnings multiple was on that deal, but I know that it was done at a significant premium to the public price on the stock so I'm sure it was up in the range that you just said doesn't happen. This deal is obviously notable for its size, but companies being taken private are pretty common. Panera Bread is another recent example and a good one since its business is pretty similar to Starbucks. That deal was for about 7B. Also a pretty big check. Also at a high multiple.

robomartin 6y ago
Easy: Once the stock is valued at x nobody is going to sell it for x/2. We have to separate the reality of the price of a stock from the value of a company. I mean, the numbers don’t have to be very complicated: If a company makes $1MM per year, how much would you pay to buy it? $5MM? $30MM? In the first case you get your money back in 5 years (simplified). In the other case in 30 years. A lifetime. Another way to look at it: The guy who paid 5x will make $25MM in 30 years. The one who paid 30x walks away with zero profits in 30 years. When people pay 20x, 30x, 100+x for stocks all they are betting on is that someone will be willing to pay more in the future.
- harryh 6y ago
  Easy: Once the stock is valued at x nobody is going to sell it for x/2. Well sure. But you said no one would be willing to buy it at typical public valuation levels. And here are my counterexamples showing how that assertion was wrong. And yes, there are lots of investments that take a long time to pay off. You ever invest in real estate? You aren't paying off that mortgage in 5 years in the vast majority of cases.
  - robomartin 6y ago
    I think what I said is perfectly congruent. Without the distortion of speculation nobody in their right mind would pay 30x or 100x earnings for a company. Price over Earnings. Earnings: What a company makes in one year. Multiple: How many years of annual earnings you are willing to pay for the company. 5, 10, 30, 100. This number doesn't exist int he vacuum, it very directly means --to a rough order of magnitude-- that you will need to wait 30 to 100 years to break even, assuming you take 100% of earnings every year for that duration of time, there are no economic downturns, the company remain viable and competition does not chip away at earnings. Think about that for a moment, an investment that produces no gains whatsoever for at least 30 to 100 years. This isn't hard to reason. Would you take everything you own, invest it into buying a company and know you are paying so much that it would take 100 years to break even? Or 30 years? Or 15? 10? 5? Ah. There you go. most people will say yes somewhere between 5 and 10, and that's because this is the real world. I've said many times now, the only way these multiples exist is because the stock market is the domain of uninformed speculation. VC's and others love it because they can get ridiculous valuations for investments, for companies, that would have never produced those kinds of returns in the real world. Individual investors love it because the promise of of other speculators willing to pay more for their already inflated purchases would earn them money. The whole thing is a speculative house of cards. I say this as someone who has been very involved in the markets for years. I very much like the reality that others are willing to pay more for things I buy. I also like the reality that these valuations are driven by emotion. I have made a ton of money recognizing and playing emotion in day trading by shorting stocks. I made money playing the emotion going up and emotion going down. Once you have that perspective it is impossible to look at the stock market as anything other than Las Vegas with different rules. Today there's algorithmic trading. When I was day trading this wasn't so prevalent. People like me were using custom software tools to help make decisions but nothing even close to what exists today was in place back then. I am not sure I would do well day trading today. Not sure it would be easy to read emotion. A typical counterargument is: Well, you buy the company, inject Y capital into it and increase earnings. OK. Assume you buy the company for 100x earnings, inject Y and now increase earnings by a factor of 2. It will take a minimum of 50 years to break even. And, BTW, doubling earnings isn't that easy. Sure, yes, there are a bunch of internet companies who fly high and have done such things, but at some point earnings become somewhat asymptotic due to various factors, including competition, market size, etc. And it takes time, lots of time, for earnings to increase once a product offering starts to mature. In other words, from startup to flight altitude the rate of change can be incredible, once at flight altitude the scenario is very different. In the VC world that's where the speculation lies. They are betting that these companies are going to be able to grow at a >45 degree slope for just enough time to go public, grab a really nice multiple and convert risk to cash, lots of it. Hey, more power to them, they are providing a valuable service (capital) and deserve to make money. However, I firmly believe individual investors have to be very careful about the idea of actually believing these valuations are real. They are only real if someone else is willing to pay more for what you just bought, otherwise the entire things is imaginary and fueled by speculation. Just like baseball cards. The most fundamental question might be: What is reality?
    - cft 6y ago
      Also in the VC and IPO world, there are companies with infinite PE, like Pinterest. I am curious how much of the total stock market cap these account for, because to be in S&P 500 you need to have positive earnings for 4 quarters. These companies may have an infinite PE for a decade (lifetime of a VC fund), then onloaded onto public and continue to have 0 EPS till the founders and VCs cash out. The "modest" PEs of S&P 500 of 25 are an indication of increasing centralization, where a diminishing number of companies attract an increased share of the public investment (not mentioning that even this modest PE of 20-25 is unachievable for a non-VC tech company in the event of sale)
      - harryh 6y ago
        not mentioning that even this modest PE of 20-25 is unachievable for a non-VC tech company in the event of sale I literally mentioned Panera Bread upthread which was taken private at these multiples.
        cft 6y ago
        Not sure what you are talking about: in 1993 Panera's predecessor was bought by Au Bon Pan, a public company, and it has since remained in that orbit https://en.wikipedia.org/wiki/Panera_Bread https://en.wikipedia.org/wiki/Panera_Bread I would not compare the later acquisitions or Panera to that of a bootstrapped non-VC businesses. I am thinking of LiveJournal, HotOrNot, Airliners.net etc - I am personally familiar with those multiples, and they are not 20 PE. This Main St economy has as much in common with current public Wall St economy as Cessna 172 and the F-22. They both fly, but the rules are different..
        harryh 6y ago
        This Main St economy has as much in common with current public Wall St economy Well obviously. There is a fundamental different in the economics of a single location coffee shop and a multinational company like Starbucks. The difference in these economics provides more than enough justification for one being worth a small multiple on earnings and the other a large multiple.

by harryh 6y ago

robomartin 6y ago

Easy: Once the stock is valued at x nobody is going to sell it for x/2. We have to separate the reality of the price of a stock from the value of a company. I mean, the numbers don’t have to be very complicated: If a company makes $1MM per year, how much would you pay to buy it? $5MM? $30MM? In the first case you get your money back in 5 years (simplified). In the other case in 30 years. A lifetime. Another way to look at it: The guy who paid 5x will make $25MM in 30 years. The one who paid 30x walks away with zero profits in 30 years. When people pay 20x, 30x, 100+x for stocks all they are betting on is that someone will be willing to pay more in the future.

harryh 6y ago
Easy: Once the stock is valued at x nobody is going to sell it for x/2. Well sure. But you said no one would be willing to buy it at typical public valuation levels. And here are my counterexamples showing how that assertion was wrong. And yes, there are lots of investments that take a long time to pay off. You ever invest in real estate? You aren't paying off that mortgage in 5 years in the vast majority of cases.
- robomartin 6y ago
  I think what I said is perfectly congruent. Without the distortion of speculation nobody in their right mind would pay 30x or 100x earnings for a company. Price over Earnings. Earnings: What a company makes in one year. Multiple: How many years of annual earnings you are willing to pay for the company. 5, 10, 30, 100. This number doesn't exist int he vacuum, it very directly means --to a rough order of magnitude-- that you will need to wait 30 to 100 years to break even, assuming you take 100% of earnings every year for that duration of time, there are no economic downturns, the company remain viable and competition does not chip away at earnings. Think about that for a moment, an investment that produces no gains whatsoever for at least 30 to 100 years. This isn't hard to reason. Would you take everything you own, invest it into buying a company and know you are paying so much that it would take 100 years to break even? Or 30 years? Or 15? 10? 5? Ah. There you go. most people will say yes somewhere between 5 and 10, and that's because this is the real world. I've said many times now, the only way these multiples exist is because the stock market is the domain of uninformed speculation. VC's and others love it because they can get ridiculous valuations for investments, for companies, that would have never produced those kinds of returns in the real world. Individual investors love it because the promise of of other speculators willing to pay more for their already inflated purchases would earn them money. The whole thing is a speculative house of cards. I say this as someone who has been very involved in the markets for years. I very much like the reality that others are willing to pay more for things I buy. I also like the reality that these valuations are driven by emotion. I have made a ton of money recognizing and playing emotion in day trading by shorting stocks. I made money playing the emotion going up and emotion going down. Once you have that perspective it is impossible to look at the stock market as anything other than Las Vegas with different rules. Today there's algorithmic trading. When I was day trading this wasn't so prevalent. People like me were using custom software tools to help make decisions but nothing even close to what exists today was in place back then. I am not sure I would do well day trading today. Not sure it would be easy to read emotion. A typical counterargument is: Well, you buy the company, inject Y capital into it and increase earnings. OK. Assume you buy the company for 100x earnings, inject Y and now increase earnings by a factor of 2. It will take a minimum of 50 years to break even. And, BTW, doubling earnings isn't that easy. Sure, yes, there are a bunch of internet companies who fly high and have done such things, but at some point earnings become somewhat asymptotic due to various factors, including competition, market size, etc. And it takes time, lots of time, for earnings to increase once a product offering starts to mature. In other words, from startup to flight altitude the rate of change can be incredible, once at flight altitude the scenario is very different. In the VC world that's where the speculation lies. They are betting that these companies are going to be able to grow at a >45 degree slope for just enough time to go public, grab a really nice multiple and convert risk to cash, lots of it. Hey, more power to them, they are providing a valuable service (capital) and deserve to make money. However, I firmly believe individual investors have to be very careful about the idea of actually believing these valuations are real. They are only real if someone else is willing to pay more for what you just bought, otherwise the entire things is imaginary and fueled by speculation. Just like baseball cards. The most fundamental question might be: What is reality?
  - cft 6y ago
    Also in the VC and IPO world, there are companies with infinite PE, like Pinterest. I am curious how much of the total stock market cap these account for, because to be in S&P 500 you need to have positive earnings for 4 quarters. These companies may have an infinite PE for a decade (lifetime of a VC fund), then onloaded onto public and continue to have 0 EPS till the founders and VCs cash out. The "modest" PEs of S&P 500 of 25 are an indication of increasing centralization, where a diminishing number of companies attract an increased share of the public investment (not mentioning that even this modest PE of 20-25 is unachievable for a non-VC tech company in the event of sale)
    - harryh 6y ago
      not mentioning that even this modest PE of 20-25 is unachievable for a non-VC tech company in the event of sale I literally mentioned Panera Bread upthread which was taken private at these multiples.
      - cft 6y ago
        Not sure what you are talking about: in 1993 Panera's predecessor was bought by Au Bon Pan, a public company, and it has since remained in that orbit https://en.wikipedia.org/wiki/Panera_Bread https://en.wikipedia.org/wiki/Panera_Bread I would not compare the later acquisitions or Panera to that of a bootstrapped non-VC businesses. I am thinking of LiveJournal, HotOrNot, Airliners.net etc - I am personally familiar with those multiples, and they are not 20 PE. This Main St economy has as much in common with current public Wall St economy as Cessna 172 and the F-22. They both fly, but the rules are different..
        harryh 6y ago
        This Main St economy has as much in common with current public Wall St economy Well obviously. There is a fundamental different in the economics of a single location coffee shop and a multinational company like Starbucks. The difference in these economics provides more than enough justification for one being worth a small multiple on earnings and the other a large multiple.