Monday, June 15, 2009

Facebook investment valuation

Facebook headquarters in downtown Palo Alto, C...Image via Wikipedia

DigitalSky Technologies, a prominent Internet investor in Russia and Europe, has invested $200 million in FaceBook, in return for a 1.96% stake, effectively implying that the company's valuation is $10 billion. Can we call this a fair value of the company, especially given that Microsoft earlier invested $240 million for a 1.6% stake, pegging the company's value at $15 billion? FaceBook had about 307 million visitors in April, implying a $32.57 per visitor valuation. At Accuserve, our read is that when companies and individuals invest in companies to acquire lower stake or invest in small amounts, they are willing psychologically to accept enhanced valuations. When the stakes are small, so to speak, the risk associated with not achieving that enhanced valuation is rather small, in the minds of the investor. When you have a lot of money in a company, the risks of not achieving that valuation becomes quite big. The other issue is how the investor gauges exit routes. In IPO markets, the listing price requires high disclosure requirements - implying a valuation that could be significantly less than when exiting in M&A markets. Perhaps, the investors realize that Facebook may only opt for a private exit, where such high valuations can be maintained with relatively less scrutiny. At Accuserve, our philosophy has always been to look beyond the numbers. Several Internet related transactions require a reverse thinking of established valuation concepts. For instance, valuation specialists argue that when looking at minority investments, a discount be applied on the fair value of comparable transactions that happened at a so-called premium. We argue differently for Internet companies. We argue that, in the Internet industry, several transactions have occurred in a flipped manner i.e. majority stake acquisitions have happened at a discount to valuations seen during minority stake investments. The primary goal when an enhanced valuation is being assigned during early stages of a company's development is for the founders to retain control of the company and not give away so much that it disincentivizes the founders. We have to account for this thinking and this is best done by thinking about Internet valuations in a different way.
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Friday, June 12, 2009

California digitizing textbooks?

In what maybe a decent move to usher in some semblance of fiscal management of the California Budget with its gaping hole, as wide as the recently discovered Borealis Basin on Mars, Gov. Schwarzenegger is talking about introducing digitized textbooks in schools - K1-K12. By some estimates, California Government's share of the textbooks comes to around $300 million (smaller than the cost of building a B2 bomber) but large enough to warrant discussions to reduce it. It is pertinent to note that digitized textbooks have already been introduced in some schools in China and other parts of the world. One of my clients is a leading promotor of digital education services in China and the company was able to profit rapidly from the Chinese government's deregulation of the Chinese education industry. Tons of paper is saved as well, which will net the California Government a large amount of carbon credits that can be further off loaded and traded in the green exchanges. Finally, information can be updated on the fly so that students do know that the Borealis Basin in the Northern Martian Hemisphere has replaced the Hellas Basin in the Southern Martian Hemisphere as the largest impact crater in the worlds we know of or that Pluto is no longer a planet in our solar system. Wait! How would the creationists react to the digitized era? That's a question best left to anyone's imagination.

Thursday, June 11, 2009

Pressures on the dollar as a reserve currency

Recently, Brazil and Russia announced that they will be parking about 5 to 10% of their foreign exchange reserves in IMF bonds whose underlying currency is the Special Drawing Rights (SDRs). The amount is expected to be $10 billion each. China is expected to contribute about $50 billion and India about the same as Brazil or Russia. The BRIC (Brazil, Russia, India, China) countries seem to want to start exploring alternatives to the US dollar as a reserve currency for global trade. While it is very premature to consider whether the US dollar will be ultimately replaced by the IMF's SDRs as the world's reserve currency, we can speculate that the BRIC countries want a bigger voice in global affairs and would probably contribute to IMF programs only based on how the value of their vote grows. More the say these countries get in the IMF financing process, the more they will contribute. While China holds the world's largest foreign exchange reserves, India holds the third largest and Russia the seventh. Together, these countries can make a significant impact on how the dollar continues to be used as the world's reserve countries. What that means for most of us is that, as the long-term US treasury yields inch up when the treasuries get dumped in the market, the mortgage rates which track LT treasury yields will spiral upwards. For people who refinance in a declining home value market, this is awful news as they'd have to pay higher monthly payments on a declining home value market. For new buyers, the price reduction of homes has to be steep enough to allow them to be able to afford the monthly payments. The US mortgage market will work only as long as the LT yields are in control. Do we see another crisis here? 

Sunday, June 7, 2009

A wealth of search

There appears to be momentum gaining for newer types of search engines - engines that pay people for how much their words have been looked at and/or used as a reference by other folks. The more the attention you get, the more you get paid. Topsy (, a search engine, that is focused on redefining search by not only looking at how many times your pages are linked but also who is linking it and how it is linked, may be trying to usher in an Internet version of getting paid for the influence one commands among a community. While the scale of such search engines may not match the generic engines such as Google or the redesign MSN engine Bing, there exists a reasonable business case for such engines to coexist with or within large search engines. The question is how far will this paradigm be extended? Will we see a day where search results are returned based on precisely how the author of the content wants it to be shown - to the most relevant community and to the persons commanding the higher influences within it?