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The point of the piece is that one should care because it can affect the broader economy, including lots of people who didn't personally take on any tech-compan

The point of the piece is that one should care because it can affect the broader economy, including lots of people who didn't personally take on any tech-company-bubble risk. Sort of like when banks overpay for, say, mortgage-backed securities. Obviously you can disagree with the piece, but it is literally attempting to answer the question you're posing rhetorically here.

ChuckMcM 12y ago
This is the entire argument of the piece: "When he [company CEO] doesn’t [make the valuation call], bankers and lawyers run the show. Valuations are derived from spreadsheets: some figure times earnings before interest, taxes, depreciation, and amortization (EBITDA), down to five significant figures. Never mind that many of the assumptions are bogus. The lawyers and bankers argue with the target, fudging the assumptions back and forth. But these valuations are at least tacked to something in the mortal realm." "When the UMaster does care, the deal is just a made up number that he pulls out of his, er, pocket. All caution is thrown to the wind, and the bankers and lawyers scramble to back-fit the spreadsheets and assumptions after the fact. The back-fitting occurs because everyone needs to be covered. Everyone except the big guy, that is." The author's argument is that the CEO of a company is incapable of making a reasoned value judgement about the "value" of a potential acquisition. In my opinion, what he is actually saying is "I don't understand how these guys see value, it must be incompetence." And yet, somehow, the previous "stupid" valuation (of Instagram) seems to have paid off for Facebook, not only that but they are slowly and inexorably eating into Google's tender search advertising flank. How do you value that? How does Mark Zuckerberg? So does the article really answer any question? That too is an interesting way to analyze it. He claims it in the title, gives an actual (non-Tech) mechanism (quantitative easing and near zero interest rates that are known causes of inflation), and then rambles a lot about how he doesn't get the valuations being thrown around, labels those valuations as inflationary, and then backs off and hedges like crazy with "With billionaires now as thick as blackberries (the fruit), this type of overvaluation can’t be good for the rest of the economy. Only time will tell whether these fat birds come home to roost and we find ourselves buying chicken at $500 a pound." Except that it is expected that $500 a pound chicken will come about as a result of pumping a bunch of money into the economy, so how much of that can be laid at the feet of a tech company acquisition? How about even a smidgen of a hint as to how he might separate out the impact of his two "causes" ? As you can guess I think the complete article is, as I summed it up as, "I don't get how they got these values, they must be wrong or bad or both." and while I sympathize with his lack of comprehension, I never understood how lending money to people without a way to pay it back, to buy houses even passed the sniff test, I could give you some reasoning as to why I thought it was a bad idea. Clearly you read it differently, help me understand your reading of how it can effect the broader economy?
- rayiner 12y ago
  Your point about "why does anyone else care" is very good, but I think it's unfair to characterize the author's position as "I don't understand how these guys see value, it must be incompetence." The author's point about how M&A traditionally happens is accurate. A team at Morgan Stanley or wherever looks at the company's numbers (cash flow, debt, growth rate, etc), and comes up with a valuation based on very concrete factual information. The target, if it's shopping, will have its financial advisers do the same thing. Then the CEO's will argue over those figures. It's a banker-driven process. Tech M&A is often detached from that traditional process. A $19 billion valuation for WhatsApp didn't fall out of some Morgan Stanley analyst's spreadsheet. It's CEO-driven. It's a result of what Mark Zuckerberg thought it would take to buy the company. That's a very different process from how M&A valuation is traditionally done, and it's not wrong to point that out. You're right though, in that I don't think all this means we'll end up with $500/lb chicken.
  - mbesto 12y ago
    A team at Morgan Stanley or wherever looks at the company's numbers (cash flow, debt, growth rate, etc), and comes up with a valuation based on very concrete factual information. What if I told you that these "concrete factual information" numbers are just as made up as Daily Active Users, Monthly Active Users, number of downloads, etc. It doesn't matter what the number is, it's just whatever the market values. Right now the market values the numbers behind DAU, MAU, because well... Facebook and Google exist. They set the precedent of valuing MAU/DAU and have made money doing it, so the assumption is that any other company that also values these same metrics should follow suit. Where I think we are in full agreement is the fact that DAU/MAU is not fungible. Meaning, the same 3hrs a day someone uses Facebook isn't the same 3hrs that someone uses twitter. But, lest we forget, the market is irrational. EDIT: The fact that this "Mattermark" number exists explains the story even better than I can: http://mattermark.com/wordpress/wp-content/uploads/2014/02/fundersclubporfolio.png http://mattermark.com/wordpress/wp-content/uploads/2014/02/f...
  - wdewind 12y ago
    > Tech M&A is often detached from that traditional process. A $19 billion valuation for WhatsApp didn't fall out of some Morgan Stanley analyst's spreadsheet. It's CEO-driven. It's a result of what Mark Zuckerberg thought it would take to buy the company. Really? I'd think it's a result of what the post-Morgan Stanley analysts who are now working at FB thought it would take to buy the company, not Zuck's whims. And it's a price that is unique to FB. You can't take a private equity price and assume it has anything to do with the publicly traded value of a company at all.

ChuckMcM 12y ago

This is the entire argument of the piece: "When he [company CEO] doesn’t [make the valuation call], bankers and lawyers run the show. Valuations are derived from spreadsheets: some figure times earnings before interest, taxes, depreciation, and amortization (EBITDA), down to five significant figures. Never mind that many of the assumptions are bogus. The lawyers and bankers argue with the target, fudging the assumptions back and forth. But these valuations are at least tacked to something in the mortal realm." "When the UMaster does care, the deal is just a made up number that he pulls out of his, er, pocket. All caution is thrown to the wind, and the bankers and lawyers scramble to back-fit the spreadsheets and assumptions after the fact. The back-fitting occurs because everyone needs to be covered. Everyone except the big guy, that is." The author's argument is that the CEO of a company is incapable of making a reasoned value judgement about the "value" of a potential acquisition. In my opinion, what he is actually saying is "I don't understand how these guys see value, it must be incompetence." And yet, somehow, the previous "stupid" valuation (of Instagram) seems to have paid off for Facebook, not only that but they are slowly and inexorably eating into Google's tender search advertising flank. How do you value that? How does Mark Zuckerberg? So does the article really answer any question? That too is an interesting way to analyze it. He claims it in the title, gives an actual (non-Tech) mechanism (quantitative easing and near zero interest rates that are known causes of inflation), and then rambles a lot about how he doesn't get the valuations being thrown around, labels those valuations as inflationary, and then backs off and hedges like crazy with "With billionaires now as thick as blackberries (the fruit), this type of overvaluation can’t be good for the rest of the economy. Only time will tell whether these fat birds come home to roost and we find ourselves buying chicken at $500 a pound." Except that it is expected that $500 a pound chicken will come about as a result of pumping a bunch of money into the economy, so how much of that can be laid at the feet of a tech company acquisition? How about even a smidgen of a hint as to how he might separate out the impact of his two "causes" ? As you can guess I think the complete article is, as I summed it up as, "I don't get how they got these values, they must be wrong or bad or both." and while I sympathize with his lack of comprehension, I never understood how lending money to people without a way to pay it back, to buy houses even passed the sniff test, I could give you some reasoning as to why I thought it was a bad idea. Clearly you read it differently, help me understand your reading of how it can effect the broader economy?

rayiner 12y ago
Your point about "why does anyone else care" is very good, but I think it's unfair to characterize the author's position as "I don't understand how these guys see value, it must be incompetence." The author's point about how M&A traditionally happens is accurate. A team at Morgan Stanley or wherever looks at the company's numbers (cash flow, debt, growth rate, etc), and comes up with a valuation based on very concrete factual information. The target, if it's shopping, will have its financial advisers do the same thing. Then the CEO's will argue over those figures. It's a banker-driven process. Tech M&A is often detached from that traditional process. A $19 billion valuation for WhatsApp didn't fall out of some Morgan Stanley analyst's spreadsheet. It's CEO-driven. It's a result of what Mark Zuckerberg thought it would take to buy the company. That's a very different process from how M&A valuation is traditionally done, and it's not wrong to point that out. You're right though, in that I don't think all this means we'll end up with $500/lb chicken.
- mbesto 12y ago
  A team at Morgan Stanley or wherever looks at the company's numbers (cash flow, debt, growth rate, etc), and comes up with a valuation based on very concrete factual information. What if I told you that these "concrete factual information" numbers are just as made up as Daily Active Users, Monthly Active Users, number of downloads, etc. It doesn't matter what the number is, it's just whatever the market values. Right now the market values the numbers behind DAU, MAU, because well... Facebook and Google exist. They set the precedent of valuing MAU/DAU and have made money doing it, so the assumption is that any other company that also values these same metrics should follow suit. Where I think we are in full agreement is the fact that DAU/MAU is not fungible. Meaning, the same 3hrs a day someone uses Facebook isn't the same 3hrs that someone uses twitter. But, lest we forget, the market is irrational. EDIT: The fact that this "Mattermark" number exists explains the story even better than I can: http://mattermark.com/wordpress/wp-content/uploads/2014/02/fundersclubporfolio.png http://mattermark.com/wordpress/wp-content/uploads/2014/02/f...
- wdewind 12y ago
  > Tech M&A is often detached from that traditional process. A $19 billion valuation for WhatsApp didn't fall out of some Morgan Stanley analyst's spreadsheet. It's CEO-driven. It's a result of what Mark Zuckerberg thought it would take to buy the company. Really? I'd think it's a result of what the post-Morgan Stanley analysts who are now working at FB thought it would take to buy the company, not Zuck's whims. And it's a price that is unique to FB. You can't take a private equity price and assume it has anything to do with the publicly traded value of a company at all.