Fair Market Value

Years ago a seasoned investor made a comment about M&A deals that has stuck with me, he said:

"Nobody ever sells a company, what happens is that someone buys a company."

What he meant is that sellers markets are illusions and even the hottest company is dependent upon someone emerging who not only has the willingness to buy, but also the ability combined with markets trends that support a desired valuation. There are outlier deals that emerge from time to time that test this assumption, like Epiphany acquiring Octane for $3b in 2000, but for the most part acquisitions are rather one-sided in that a buyer is driving terms and conditions based on the acquiree’s ability to be a threat or opportunity to the acquirer.

For whatever reason I thought of that today when I read this story (link via Volokh) about the real estate market in central Florida.

Orlando is becoming one of the most difficult cities in America to sell a home for fair-market value, WESH 2 News reported.

Note the interesting use of the term "fair market value", which is used to suggest that homes in Orlando are not selling for what they are worth. The simple fact is that "fair market value" is what a competitive marketplace of acquirers (home buyers in this case) will pay for something, as opposed to how this article is written, which suggests that fair market value is what the sellers believe their homes are worth.

This should be a moment for pause for the web 2.0 market because the parallels to real estate are frightening. There are hundreds of companies that are going to step into the venture capital valley of death where their investors, current and potential, ask them "okay, so what is the business here and how is it going to get big without disproportionate investment of capital?".

Many companies won’t emerge from the VoD and will be searching for acquirers, who for the most part are a pretty bright bunch of people who appreciate startup company valuations but also know well the general marketplace trends that drive the emotional side of valuations.

I’m not predicting a firesale environment like we saw in 2002 by any means, but what I am suggesting is that entrepreneurs would do well to recalibrate their expectations of what their companies are worth. The post money from your last round really doesn’t matter, what someone is willing to pay does.

More on this topic (What's this?)
Intangible Value Drivers
Tiger Woods Destroyed $12 Billion in Market Value
Another Market Value Measurement
Read more on Market value at Wikinvest

More on Zimbabwe

"The price freeze has sparked a wave of panic buying that has emptied Zimbabwean shops of basic commodities, and critics say the formal economy is tottering on the brink of total collapse."

It would appear that we are well past the "brink of total collapse"…

The lack of concern for the social welfare of his people is evident in his rejection of 47,400 tons of food aid the U.S. has offered. While I unquestionably support my government’s humanitarian gesture I continue to wish that regional African governments would step up and fix the problem themselves because if I can’t take one more international benefit concert put on by rich white people to "save Africa from itself"… and don’t just take my word for it, read Ozodinma Iweala’s op-ed in the WaPo on this very subject:

There is no African, myself included, who does not appreciate the help of the wider world, but we do question whether aid is genuine or given in the spirit of affirming one’s cultural superiority. My mood is dampened every time I attend a benefit whose host runs through a litany of African disasters before presenting a (usually) wealthy, white person, who often proceeds to list the things he or she has done for the poor, starving Africans. Every time a well-meaning college student speaks of villagers dancing because they were so grateful for her help, I cringe. Every time a Hollywood director shoots a film about Africa that features a Western protagonist, I shake my head — because Africans, real people though we may be, are used as props in the West’s fantasy of itself. And not only do such depictions tend to ignore the West’s prominent role in creating many of the unfortunate situations on the continent, they also ignore the incredible work Africans have done and continue to do to fix those problems.

William Easterly wrote an equally compelling op-ed in the same publication last Feb, the one graph that jumped out at me should be laminated in a wallet (or perhaps Birkin bag?) sized card for all well meaning celebrities and diplomats to carry with them.

"The West’s focus on sensational tragedies obscures the achievements of people such as Patrick Awuah and Robert Keter, who are succeeding even against tremendous odds. Economic development in Africa will depend — as it has elsewhere and throughout the history of the modern world — on the success of private-sector entrepreneurs, social entrepreneurs and African political reformers. It will not depend on the activities of patronizing, bureaucratic, unaccountable and poorly informed outsiders."


More on this topic (What's this?)
Scrambling Up Everest
Moral Equivalence? Dead Lion vs. Dead Humans vs. Dead World!
Inflation, Zimbabwe Style
Read more on Investing in Zimbabwe, Commodities, Food & Beverage at Wikinvest