We never thought that we would hear the logic once again of the dotcom nightmare market that went into overdrive in 1999 through 2001, but that’s exactly what Forrester Analyst Charlene Li is proposing upon hearing that Microsoft may be in talks to buy 5% of Facebook for between $300 million and $500 million.
Her logic is that new Facebook apps are on their way, that the company has managed a transition out of the limited student market and that Microsoft consumer know how can help. She then multiplies up the value of each ‘eyeball,’ the 19 million visitors and concludes that yes Facebook could be worth $10 billion.
MySpace went for $580 million, YouTube went for $1.65 billion, and are bigger and have far more visitors, so does that mean they now have valuations approaching $100 billion? They might if you followed the Forrester logic, but of course a lot of this is nonsense. Microsoft has to pay a premium for any company that it wants to buy, because it loses so many auctions, and because its market capitalization has not changed an inch in 4 years (which makes it hard to use shares as an incentive). It is only buying 5% of the company, so there is a premium for that, because it will be getting far more control than the 5% through various additions to the shareholding rules.
Microsoft paid $6 billion for aQuantive, around 12 times existing revenues, and so it is not a discerning buyer. If it doesn’t buy someone it just returns its oceans of cash to shareholders, so it tends not to accurately perceive the value of money. That doesn’t mean that someone else (like the public) might come along later and pay $6 billion to $10 billion for the rest of the shares.