September 24, 2006
Blog 1 - Is Facebook Worth $1 Billion?
It seems that Yahoo is on a fast track to acquiring Facebook, one of the largest networking sites out there. Reports from both The New York Times (click here to read the article) and CNN MONEY (click here to read the article) project that the buyout could entail Yahoo coughing up currency to the tune of about $1 billion. Is Facebook – a social-networking site that does $50 million a year – worth a billion dollars for Yahoo?
When accountants value a company that is being acquired, they make sure to keep in mind that a company’s “goodwill” and “intangible assets” are big portions of the acquisition price. In the case of Facebook, Yahoo should not focus on the $50~$100 million advertising revenue it can bring in. After all, it should take about 30 years for Facebook’s $50 million in annual revenue to yield $1 billion dollars, when discounting for future cash flows. It is the intangibles that Yahoo needs to focus on, when doing the cost-benefit analysis. I have a couple of suggestions:
- Market Structure: After losing its “top internet company” crown to Google, Yahoo wants to survive in the highly competitive market of internet search engine sites. It needs to consider that other companies, namely, Viacom, is already after Facebook – In January, Viacom offered Facebook $750 million, which was turned down. After purchasing Facebook, Yahoo will gain leverage upon competition (i.e. Google) via forbidding them to advertise on Facebook or charging an extravagant fee for it.
- Demographics: Facebook captures about 9 million people, most of whom are U.S. college students. Is this the market segment Yahoo wants?
- The Dot-Com Bubble: The dog-com bubble, which seems to be in a distant memory for a lot of us, should remind Yahoo how easy it is for an internet company to lose its value. Given that Facebook has a limited value in terms of tangible assets, $1 billion is a lofty price for a 2 year-old website.
- Compare Prices: Market is the best ground when it comes to determining the price of any good. Consider these two figures: Myspace was sold to NewsCorp for $580 million iVillage was sold to GE for $600 million. On top of this, consider the face that Myspace recently sealed a 3-year $900 million advertising deal with Google. How does Facebook compare?
- Technology know-how: Mark Zuckerberg, the founder of facebook, must be doing something right. Knowledge spillovers, generally, have a positive impact upon the receiver.
- Opportunity Cost: Yahoo could invest $1 billion dollar on other investments that could yield a much profitable enterprise.
In addition to these factors, Yahoo should also consider the unique nature of social net-working sites that could generate “extra” benefits. As Richard Dorfman, managing director of Richard Alan Inc., suggests, “What's beautiful about Facebook is that it's a great place to advertise because it generates the equivalent of online word of mouth.” When factoring in such an opportunity with other unique benefits – demographics, growth potential, and the market – and Yahoo seems to have a pretty good deal. If Yahoo has a billion dollars worth of coin to spare, and not have a brilliant $1 billion dollar project plan under its belt, I suggest that Facebook is a pretty good investment.
Posted by willmoon at September 24, 2006 04:09 PM