How to do fundamantal analysis

How to do fundamantal analysis

These days, numbers just seem to blur together. Microsoft is thinking about paying US$500 million for 5 percent of Facebook, which would make that company worth $10 billion. VMware, in which parent company EMC recently sold a stake to the public, is currently valued at $30 billion (that's just for VMware, not the whole of EMC).

Millions, billions, schmillons. As an IT manager, why should you care? You don't work for those companies, and you try your best to leave the numbers to the financial guys anyway.

Bad mistake. In our complex, outsourced, joint-ventured, spun-out world, sooner or later you're going to wish you knew how to cut through the BS on valuation. I guarantee that at some point as you rise through the ranks, you'll run into some big-numbers decision that just doesn't smell right. So what you need in your back pocket is a skeptical, just-the-facts-ma'am, commonsense method of clearing the FUD so that you don't get snookered by some VSIP (Very Self-Important Person). And I'm going to give you this method. It's called fundamental analysis.

Here we go, so let's put on (and snap) the latex gloves, prep the patient, and do a dry run on boiling numbers down to reality. Once you realise the complexity of valuations is mostly hype designed to justify the salaries of CFOs or investment bankers, you'll have a clearer view of the business landscape in which you're building technology.

Let's take a recent, but minor, example of an acquisition Yahoo did recently: It bought an online advertising network called BlueLithium for about US$300 million. That's chicken feed in the internet world -- Microsoft paid $6 billion for aQuantive, another internet company nobody's ever heard of ($6 billion, by the way, makes that company worth more than Hasbro, Wendy's, Blockbuster, and plenty of other companies you've actually heard of).

But back to the $300 million for BlueLithium. Why was it worth that? The company has 120 employees and refuses to disclose its revenue (and God forbid, profits). So we'll start with $300 million divided by 120: That's $2.5 million per employee. Pretty damn valuable bodies -- our first envelope calculation. Are they really worth that much?

Next calculation: An article about the deal noted that BlueLithium's core asset is the right to resell advertising on 1000 web sites in its network. We don't know if that's an exclusive right, which would make it more valuable, but we do know that $300 million divided by 1000 equals $300,000.

Now if some of those web sites are gigantic, such as USA Today, the right to sell ads on them could really be worth 300 grand. But what if the 1000 includes sites such as Couldn't you just go to all those sites and offer to pay them $200,000 to broker ads? $100,000? $50K and a cup of coffee?

You get my point. You'll never have all the facts and numbers on a deal, but when you do the simple math with the ones you do have, the picture often becomes a lot clearer. Don't ever be shy about doing that, no matter how many fancy suits are in the room. There's no such thing as a stupid question. And often the emperor is, in fact, lightly clothed.

Oh, and one last thing: Why did Yahoo do it? I know you're supposed to take lithium if you're bipolar ... maybe Yahoo's execs were getting too crazy over falling behind Google? Still, a very expensive prescription.

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