Yahoo, Apple, And Others Play Valuation Game
Apple Inc. and the company's iPhone continue to generate the lion share of headlines in the world of tech nowadays; it's the world of tech that may be worth a second look for investors.
Something crazy is going on. It seems to have begun on Monday when ourDavid Faber broke the news that Yahoo was in play, and he rattled off a list of companies that might be sniffing around for a deal. Time Warner, AT&T, Comcast, Microsoft, News Corp. The usual suspects, if you will.
But it was his details surrounding the News Corp. scenario that got tongues wagging: His sources were telling him that News Corp. was throwing around the idea of selling Yahoo its MySpace property in return for 25% of Yahoo. That would value MySpace at a stunning $10 billion, and change. The same MySpace that News Corp. picked up less than two years ago for just under $600 million.
That would be a stunning return on investment and turn the already lauded deal between News Corp and MySpace into the deal of the century!
That ascribes massive valuation to MySpace, and it's a number that seems to be getting picked up everywhere, including the Times of London today which reported much the same thing. Nevermind that the paper is owned by Rupert Murdoch. And nevermind that the sources on the MySpace valuation are all coming from within News Corp. or News Corp. properties.
In other words, this company can hang any value it wants on one of its divisions. The news will come whether somebody steps forward and bites.
Still, the rumors shine a bright light on a bizarre valuation spike that's got everybody in Silicon Valley talking. And lots of people on Wall Street as well. "I think some investors have flashbacks to the bubble days of 2000 and 200, so we need to be cognizant of that, but when we look at what Google can do and what Microsoft can do with their vast resources, they can make these valuations pay back, so we don't see egregious back to the bubble days, but on the surface, it definitely looks on the high end," RBC Capital's Robert Breza told me this morning.
He covers Microsoft, a company no stranger to hyped valuations. This was the same company that just plunked down $6 billion for online advertiser Aquantive. An 80% premium. A defensive move to take on Google which shelled out more than $3 billion for DoubleClick only a few months earlier.
There's talk that up and coming Facebook, this year's YouTube or MySpace as the ultimate investor-darling, could be worth much more than MySpace thanks to surging online traffic that shows no sign of slowing down. "We just recently passed 25 million active users and if we continue growing at this rate, then by the end of 2007 we will probably have more than 50 million active users in all different demographics all over the world," Facebook's 23-year-old founder Mark Zuckerberg told our friends at the Today Show.
This is the same company that turned down huge offers from Viacom, News Corp and a reported $900 million deal from Yahoo. What is going on here? RBC's Breza says we're not in a "Back to the Future" bubble, but it sure sounds close, at least until you dig a little deeper.
The new valuation bonanza around here is clearly raising eyebrows and prices. News Corp's MySpace price tag is leading to a lot of head-scratching. And if a deal with Yahoo does come through, that might make a Microsoft or Google play for Facebook all the more interesting. Or any other big-cap tech looking to make a defensive move against its competitors, or a new threat: Private Equity.
There is a massive amount of money sitting on the sidelines right now. Private equity is on the hunt. Investors are looking for properties to pluck from the market, only to turn around and shop them to potential suitors were probably looking to buy them in the future. It's the simple supply and demand rule.
"It's scarcity value," UBS Securities' Heather Bellini tells me this morning. "Microsoft, Google, Yahoo, who are the companies that can make a difference to their businesses? In particular, if you're Microsoft, for example, what companies can really help you compete against Google in the long run? I think a list of those companies is relatively small," meaning those companies are seeing their inherent value rise. Daily. And in some cases, exponentially.
Regarding Facebook and other leaders in the social-networking space, so red-hot right now, Bellini says: "Do I think those properties will remain independent? No."
Strange times. There was a time when cash was king. Then, investors scoffed at companies with too much cash on their balance sheets and were loudly searching for ways to return that value to them. Stock buybacks, dividend increases, etc. Now, all of sudden, a cash-heavy balance sheet might be a good thing as M&A activity heats up big time, and tech companies, especially in the software world, find themselves competing with private equity as well as competitors for deals.
"It's not just the cash on the balance sheets they have, but it's the ability to lever up their balance sheet which gives them even more potential buying power, or more aggressive in share buybacks," says Bellini.
So who's next? The good money's on the software industry where valuation, cash as a percentage of market-cap, it so out of whack compared to almost every other tech sector. It's a real quandary for these companies.
"Do we buy back stock, despite the fact that interest rates have gone up so much and we can earn a higher yield on our cash balance, or do we deploy our excess cash into areas where we can grow topline faster, so I think that's the debate the entire software sector is going through as we speak," says Bellini.
It's a question these companies, as well as those on the hunt for a nice social media site, will want to ask and answer sooner rather than later. Look at Microsoft and Aquantive. The company probably could've snapped up Aquantive for half the price. If it acted BEFORE Google.
Message to buyers: Valuations are on the move. Today's bargains could carry tomorrow's bubble price tag.
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