Virulent Word of Mouse

February 11, 2011

Valuing companies: A primer

Filed under: Short observations,Uncategorized — Shane Greenstein @ 3:35 pm

How much is a company worth? I get this question so often I have grown tired of answering it. Indeed, there is no right answer.

Along comes Anders Bylund to the rescue. He has put together a very nice compendium of the debate over valuations. If you are interested, look here. The article provides a particularly thorough discussion about why the different ways to value a firm yield such different rankings, especially in high tech, where the financial position of firms looks rather different than the rest of the economy.

To be fair, Bylund focuses on how different valuations work.  He takes the typical pricing conduct, revenue patterns, and debt structures of high tech firms as a given, then shows how those typical structures play out in different valuation metrics. He does not really focus on why systematic market situations lead to mismeasurement.

That leaves open a couple questions. For a high tech audience, he left a big gap: he did not talk much about why investors place so much importance on estimates of the future revenue and earnings potential of high tech firms, even though these estimates have been shown, time and again, to be quite fragile and lacking in robustness. Or, perhaps I could say it another way: why is it that high tech firm valuations reflect investor speculation about the future even though most of that speculation lacks credibility?

Ah, questions, questions, questions. So many questions, and so little time. Let’s leave that topic for another day. Enjoy this article for now. It is good progress.

1 Comment »

  1. Interesting article. So if it’s hard to say that a company is worth $x, how do journalists have such an easy time valuing mergers and acquisitions? Based on the article, maybe it has something to do with enterprise value…?

    Here’s the latest “in a deal worth $x” news: http://news.google.com/news/search?q=%22in+a+deal+worth%22+merger|acquisition

    Comment by Frank — February 11, 2011 @ 10:32 pm | Reply


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