Your company is accurately valued only when money changes hands: Someone has written a check, made out to you, the shareholder, for your shares. When I tell you what your company is worth, it’s a judgment and often carries a big range. It’s a snapshot: today, and in this environment. And as we’ve seen numerous times: valuation has the ability to change spectacularly at a moment’s notice.
That’s one of the reasons bankers involved in an IPO are in such a hurry. They understand the current environment. The deal is judged to be do-able today. But, what will happen tomorrow? Time is synonymous with risk.
There are several ways to value a company. We use all applicable methods, and then coalesces around a point. The Comparable Company Method is the most apt, but it is also the one with the most slack. Especially for “industrial technology” companies. Think of Kronos, Symbol Technologies, Perkin Elmer, or even Mistras, the company we discussed last week. There are almost never true “comps” (banker slang for Comparables or Comparable Companies). You can find companies with similar characteristics: balance sheet, margins, growth rate, industry, size. But never exact.
To show you the disparity in comparable companies, let’s take a known entity: Constant Contact, an email marketing company. The Company is $268m in sales (trailing twelve months) $12.6m in net income and a $704m market cap. I did a quick click for comparables on OneSource, and landed: Active Network, Amazon, Cvent, Experian, Google, Groupon, IAC/InterActive, J2 Global, Oracle, Responsys, VistaPrint and Vocus.
It may be worth reviewing the statistics such as PE’s (Price to Earnings), PSR (Price to Sales), and margins for Amazon, IAC/InterActive, Oracle and Google, but I doubt that the results especially useful. It’s most realistic to select companies that are close in industry, size, market cap, capital investment per dollar sales, margins and growth rate.
As noted, there is never a company that is directly comparable. One of the most difficult things to accept is that valuing a company is a terribly inexact science. If you look closely at the numbers: margins, growth rate, business segments, balance sheet, capital intensive nature of the business, you’ll be able to determine value and the rationale behind your value. By the time you’ve valued a company a few thousand times, you’ll be able to intuit value to a surprising degree of accuracy
My guess is that your comps will have a few extra zeros, when compared to your company, but let that not deter us. This really is research project and an exercise to educate us and help bracket our expectations. It’s not a “plug in the numbers and here is your value” sort of exercise.