Facebook market value versus strategic value

Jason Calacanis has an interesting post, Facebook Reality Check, about the market value of Facebook. Jason digs into the numbers and calculates the valuation from several different perspectives. He comes up with a valuation somewhere between $2.5B and $5B.

Jason is reacting to comments made at the Social Graphing Conference. Please read his whole post, but take a look at this opening salvo;

At the Social Graphing conference on Tuesday our industry went in full-blown madness. A panel filled with Facebook fans (and some investors) got so worked up they claimed--among other things--that:

• a) Facebook was worth $100 billion dollars
• b) Facebook would crush Google
• c) Facebook would crush MySpace
• d) Facebook application platform is as important an innovation as the graphical user interface
• e) The top Facebook applications were worth $500M

No, I'm not making any of that up. Those were the claims, and as Mike Arrington of TechCrunch correctly pointed out, this is the kind of madness that got us in trouble the last time around (i.e. 1999).

A year ago I wrote "Facebook worth more than YouTube". At the time people thought I was insane, but I still believe facebook is worth more. In fact, MUCH more than it was a year ago.

Worth is a relative term. What Facebook is worth to the average investor using standard market valuation metrics is very different than what Facebook is worth to a strategic investor like Google, Yahoo, Microsoft, or AOL. I remember two years ago when Rupert Murdoch paid $580M for MySpace. Everyone thought he was insane. Just two years later MySpace is probably worth 10 times that...or over $5B.

Acquisitions must be viewed in the context of what it is worth to the acquirer...in their business. If their is leverage and synergy it can be worth a lot more than the valuation metrics suggest.

That said, I agree with Jason Calacanis...those guys at the Social Graphing Conference are crazy. Today Facebook is not worth $100B, will not crush Google or MySpace, and facebook apps are not worth $500M each. Ten years from now they might be right...or Facebook may have faded from memory. The truth is probably somewhere in between.

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Comments

[Mark Mayhew]

That said, I agree with Jason Calacanis...those guys at the Social Graphing Conference are "crazy".

I believe the PC term is "mentally ill"!

[Joseph Hunkins]

OK, but from a practical point of view how does one go about getting a 'strategic' valuation number?

[Julie]

I don't get it - will facebook or myspace ever be able to generate significant revenue? I can see generating a little income from the type of thing that Bob Dylan did (which I love and have on my facebook page) but myspace wants me to buy ringtones and join some dating sites. How much would a business pay to advertise that kind of thing?

[Don Dodge]

Joe, Strategic value is different for each potential acquirer. For example, PayPal was worth a fortune to eBay, but next to nothing to Google.

There is a strategic premium over and above the intrinsic value of a company. We see this in acquisitions of publicly traded companies. Take BEA as an example. The stock market valued BEA at $14 a share or $5.5 Billion. Oracle just offered $17 a share or $6.7B. That is a 25% "strategic" premium...and BEA says it is too low. The stock market ais anticipating a higher offer and the stock is now trading at $18.82.

Private companies are much harder to value, but the same bidding process happens in private meetings.

Don

[Don Dodge]

Julie, Facebook and MySpace are already generating ten million or more in advertising revenue each month. That is likely to increase over time.

I agree that much of the page view traffic at Facebook and MySpace is of dubious advertising value, but there seems to be a voracious appetite among advertisers for that demographic.

People spend over $5 Billion a year on ringtones. I have never purchased a ring tone, and I don't click on ads, but I guess a lot of people do. Go figure...

[Adi]

Excellent article. It is interesting to finally hear the terms 'value' and 'worth' instead of 'users'.