Michael Taylor
Editor of North West Business Insider
In Focus: Dot com boom
Anyone who remembers the crazy valuations of the dot com era will have had a sense of déjà vu over the past week.
Back then companies were valued on crazy multiples, sometimes before they’d even started earning revenue, let alone after they’d recorded profits. So, you have to ask yourself whether these days are returning.
Less than five years ago Facebook was supposedly worth $1bn when Yahoo! sniffed around the fledgling social networking site. By January of 2011 Facebook’s value had soared to $50bn in January 2011 after Goldman Sachs took a stake. When LinkedIn floated last week it started at $4.1bn, rising to $9bn by the time the bell rang at the end of the day’s trading.
Right on cue PwC has come up with some analysis of different valuation methodologies. It has found that at the height of the tech boom in 2000 price/earnings (PE) ratios for UK-listed technology companies peaked at a ridiculous 90x, which clearly dragged up a frothy average of around 25x for the market as a whole.
Now, multiples of listed technology companies of 16x is only slightly higher than for the overall market multiple of 15x, with a similar picture in the US. This is clearly also affecting valuations of private businesses too – as was witnessed in the deal for ECI Ventures to buy software business Fourth Hospitality this year.
Clearly in social media companies the value is being placed on the number of users, and the potential to monetise those relationships in the long term.
Ian Logan, head of the valuations team at PwC in the north, says these valuations start to make sense and he’s pretty sure too there isn’t a bubble forming for the technology sector as a whole.
"There appears to be some support for the valuations of social media sites. Google was trading on very high multiples after its IPO and is now a hugely successful company, so high PE multiples should not necessarily be taken as an indicator of a business being overvalued.
"The ability of social media sites to innovate in the long term, and to retain and monetise their subscribers, will be the true test of whether such valuations are merited."
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About Michael
Michael Taylor joined Insider in 2000 when he became editorial director. He has been responsible for overseeing the significant growth of the editorial division in this time.
Michael has played a major role in the development of Insider events, insiderbusiness.tv and is a regular contributor to BBC Radio Manchester. During his tenure as Editor of the multi-award winning North West Business Insider Magazine he has made the magazine market leader in the North West.
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