Thank you for helping me ponder the difference between price and value – and more specifically, how the Price someone is willing to pay for a company is not the same as its Valuation.
Much has been made of Snapchat’s $3bn “valuation”, on account of the buyout approach made by Facebook.
People left, right and centre have been throwing their hands in the air, chuntering about how seeing as you’re yet to turn a profit, you cannot possibly be worth $3bn.
And of course they’re right. You’re not technically worth $3bn. Not in the sense of a traditional, objective, valuation (some kind of multiple of turnover or profit) anyway.
But $3bn is the price that Facebook were apparently willing to pay for you. You were clearly worth $3bn to Mark Zuckerberg and his shareholders. So “value” it seems is in the eye of the purchaser…which is then reflected in the price they are willing to pay in exchange for the value they perceive, a somewhat more subjective matter altogether.
The “value” Facebook saw was in your potential. Or perhaps the danger of not having you. Or maybe in someone else getting you instead of them.
I know it’s only semantics really, but when the likes of the big auction houses or even estate agents value a painting or a house, what they’re actually doing is providing a guide price and then hoping that someone values the item enough to match or exceed that price*.
Which clearly was the case with the individual who was willing to pay $120m for one of Edvard Munch’s hideous messes. I’m guessing they saw value in its potential, scarcity and what others seemed willing to pay for it, as well as artistic value – the first three I get, the last, well, not so much.
Perhaps this confused and cyclical relationship between value and price goes someway to explain why Vince Cable and Goldman Sachs are getting it in the neck to such an extent at the moment.
They valued Royal Mail using objective criteria for the basis of the listing price. But as soon as shares became available, people were willing to pay a significantly higher price for them than the listing price. Which leads people to conclude that the valuation was wrong in the first place. But has Royal Mail actually become more valuable because its shares have a higher price now? Does it turn more profit, create more jobs and deliver economic growth now that people are willing to pay a higher price for its share?
My suspicion is that once the furore has died down – and a few years performance have passed under the bridge – the share price will stabilise and the original valuation will be proved to be about right.
But what do I know?
Not a lot to be honest.
But it’s diverting to think about it.
PS – I would have taken the $3bn. You crazy?
*In fact I suspect it’s the hoopla-makers in the Media that bandy the valuation word around, not the auctioneers, but anyway