Participating In Asset Inflation Can Bite You In The Rear
I really wanted to use another word to end that headline but I am trying hard these days to keep this blog clean.
Anyway, one of the many things I’ve learned the hard way is that irrational valuations can come back to haunt you. It feels so good when someone says a business you own a big piece of is worth some huge number. But unless you cash out at that price, it’s not much more than a tease. And it can come back to hurt you in many ways. The thing you must know about financial markets is they are irrational at times, but they are rational in the end.
Microsoft may have inadvertently set off some serious asset inflation that may now come back to haunt them. As most everyone knows, they paid a $15bn valuation for a small minority investment in Facebook last year that included a business deal to rep a significant amount of Facebook’s advertising inventory. Silicon Alley Insider and Kara Swisher report that Facebook’s financials look like this.
2007 Revenue: $150 million
2008 Revenue: $300-$350 million
2008 EBITDA: $50 million
So Microsoft valued one of the two leading social networking companies at 50x revenues and 300x EBITDA.
What message do you think that sent to Rupert Murdoch and News Corp? I’ll answer my own question. It told Rupert/News Corp that myspace (the other leading social net) was worth north of $15bn. I don’t know what myspace’s financial numbers are (if you do, please leave them in the comments). But here’s a guess.
2007 Revenue: $500-600 million (considering google pays $300mm/year)
2008 Revenue: $625-750 million (25% growth)
2008 EBITDA: $50-100 million
If you apply the Microsoft/Facebook multiples to myspace, you get a business worth between $15bn and $30bn.
Now many think that myspace is not worth as much as Facebook and that Rupert/News Corp is trying to sell it at the high. I am not nearly as down on myspace as most people are right now. They have an audience that is different than Facebook’s. They have a very active music thing going on. They are about to launch a third party app platform that every major Facebook app developer is going to be on. That may very well supercharge myspace’s growth in 2008 the way Facebook apps drove Facebook’s growth in 2007.
I am not saying that myspace is worth between $15bn and $30bn . But I am saying that if you overvalue Facebook, you are also overvaluing myspace. And when the company you want to buy uses a myspace overpay to make itself less interesting to you, then you are the one who gets screwed.
What goes around comes around.