Question is: Will such a situation occur? The ecosystem does lack antibodies. Since early last year, investment banks have shifted gears, and money to grab a pie of the Internet machines, has started flowing-in thick. Just six months after paying a record $550 million to settle a Federal fraud case, in January 2011, Goldman Sachs (along with Russia’s Digital Sky Technologies) invested $450 million in Facebook (with a promise to help raise another $1.5 billion), valuing the social networking site at $50 billion (valued more than the world’s second largest automaker GM – $47.91 billion – and 200% more than the world’s largest aircraft manufacturer Airbus-EADS – $16.96 billion). Groupon, a deal-of-the-day website, turned down a $6 billion takeover bid by Google in January 2011, and is now planning an IPO, which will make it a $25 billion entity. Surprisingly, Twitter, which still hasn’t broken-even (it officially launched its first revenue model in March 2010, called “Promoted tweets” revenue model, four years after its launch), carries a price tag of $10 billion. Over the last five months, other VCs have also raised huge sums to invest in tech start-ups. Accel Partners, is about to raise $2 billion for investments in Facebook’s China and US operations. Others like Bessemer Venture Partners, Greylock Partners, Sequoia Capital, Andreessen Horowitz & Kleiner Perkins Caufield & Byers have collectively raised more than $4.5 billion since September 2010.
Speaking to B&E from New York, Greg Blonder, Former Chief Technical Advisor at AT&T, while explaining the rationale behind these deals says, “These valuations are too high for any single company. They are preferring PE funding for now because private stock sales retain much of the valuation bump. Furthermore, big banks need a conduit of private sales to feed their large clients who are otherwise dissatisfied with conventional investments. It’s simple economics – supply, demand and greed.” Even Prof. Steve Blank of Haas School of Business, in his 2011 paper titled, New rules for the new bubble, discusses the danger of over-valuations in the Internet market. He writes, “The signs of a new bubble have been appearing over the last year. It is being driven by market forces on a scale never seen before in the history of commerce.” There is some reassuring science too. One like this – in 1999, 308 tech companies came out with IPOs, while 2010 saw only 20 such instances. Accepted. But the game has just got riskier. Can you imagine someone valuing a cash-guzzling Twitter for $10 billion a decade back? According to Dealogic, a total of 5,100 inorganic deals were executed in this sphere last year – the highest since 2000. Moreover, the average deal size at $46 million is also higher than the average deal size in 2000 ($40 million). An analysis of the S&P 500 composite index (which include 75 tech stocks) based on Tobin-q for a cyclically adjusted P/E values also reveals that stocks are today overvalued by 40%. As of April 14, 2011, the P/E ratio of the technology sector stood at 17.61 – lower than the current P/E ratio estimates of Facebook (50) and Twitter (28).
Now that we know that there are chances of a bubble, what is it that can be done to control it? The key lies in a Fed intervention, which can control hyper sentiments in the market by sharply increasing Fed funds rate. But such a move might lead to all PE firms, VCs and angel investors from turning their head away from funding ideas germinating in university classrooms and company boardrooms. Some even debate that using a economy-wide hosepipe to control a growing fire in a particular sector isn’t very smart. Actually, it is, for this fire, though largely unseen by most now, threatens the world. Agreed. Every start-up is not Facebook. But investors around the world do not deserve bankruptcy because of one Harvard dorm-trick!
Speaking to B&E from New York, Greg Blonder, Former Chief Technical Advisor at AT&T, while explaining the rationale behind these deals says, “These valuations are too high for any single company. They are preferring PE funding for now because private stock sales retain much of the valuation bump. Furthermore, big banks need a conduit of private sales to feed their large clients who are otherwise dissatisfied with conventional investments. It’s simple economics – supply, demand and greed.” Even Prof. Steve Blank of Haas School of Business, in his 2011 paper titled, New rules for the new bubble, discusses the danger of over-valuations in the Internet market. He writes, “The signs of a new bubble have been appearing over the last year. It is being driven by market forces on a scale never seen before in the history of commerce.” There is some reassuring science too. One like this – in 1999, 308 tech companies came out with IPOs, while 2010 saw only 20 such instances. Accepted. But the game has just got riskier. Can you imagine someone valuing a cash-guzzling Twitter for $10 billion a decade back? According to Dealogic, a total of 5,100 inorganic deals were executed in this sphere last year – the highest since 2000. Moreover, the average deal size at $46 million is also higher than the average deal size in 2000 ($40 million). An analysis of the S&P 500 composite index (which include 75 tech stocks) based on Tobin-q for a cyclically adjusted P/E values also reveals that stocks are today overvalued by 40%. As of April 14, 2011, the P/E ratio of the technology sector stood at 17.61 – lower than the current P/E ratio estimates of Facebook (50) and Twitter (28).
Now that we know that there are chances of a bubble, what is it that can be done to control it? The key lies in a Fed intervention, which can control hyper sentiments in the market by sharply increasing Fed funds rate. But such a move might lead to all PE firms, VCs and angel investors from turning their head away from funding ideas germinating in university classrooms and company boardrooms. Some even debate that using a economy-wide hosepipe to control a growing fire in a particular sector isn’t very smart. Actually, it is, for this fire, though largely unseen by most now, threatens the world. Agreed. Every start-up is not Facebook. But investors around the world do not deserve bankruptcy because of one Harvard dorm-trick!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
