Although it was stated at the time of the Facebook IPO in May last year that we were once again witnessing evidence of a return to bubble conditions in the Internet and technology space, I would venture to suggest that it would be almost impossible for valuations to get as ridiculous as they did around 1999-2000.
While in the UK we were treated to the delights of Lastminute.com in the crazy 1999/2000 period, it would appear that it was in Silicon Valley that truly went bananas in terms of valuations/hope value regarding the next big thing, be it social media or mobile communications/broadcasting. In fact, I went into the online writing area on the basis that at the turn of the century there were too many websites with not enough content to go around, implying that there would be a premium paid for topics such as finance. Indeed, I have never been paid so generously as I was 12 years ago by the now defunct TheStreet.co.uk… Ah, for the old days!
But saying that, I would still be something of an apologist for the frenzy that people had in this area, and feel that truly new or leading entities on the Internet should command massive premiums. After all, Facebook (FB) may be trading on say 60 times earnings, giving it a market capitalisation of $ 60 billion, but how much would it cost you to set up your own Facebook and make it the number one global social media operator?
This explains to me why rather than trying to copy Skype, Microsoft (MSFT) decided to take it over for $8.5 billion and so paying 32 times earnings for the privilege of buying the Internet phone service provider. Microsoft may never get its money back, but like Google buying YouTube for $1.65 billion seven years ago, such prices can be justified on a strategic basis, and that in the new frontier of technology, either you are the first, or the biggest, or you are nothing.
Unfortunately, we have seen what happens when a company takes over a market leading new economy business and converts into an also-ran or even worse, a non runner. News Corp (NWS) paid $580m for MySpace in 2005 and sold it for $35m six years later. You almost feels sorry for Rupert Murdoch. Ok, well, actually you don’t.
We were reminded of such high finance today with the sale of social media group Bebo being sold back to its founder Michael Birch for $1 million after it had been sold to AOL for a cool $850m, netting him $600 million. It is a shame he wasn’t able to go short when he signed on the dotted line with AOL or he would probably be regarded as one of the best traders in history! Certainly , if he can sell it on for another $850m in a few years time that would be a decent run.