The Connected World & Market Valuation

30 Jul

Anand Mahindra, the CEO of the $16.6 Billion Mahindra Group tweeted on the fateful day when Facebook announced the buyout of WhatsApp for $22 Billion, an astounding amount by any valuation standard. Mr. Mahindra said in his tweet, “Every CEO’s trying to figure out What’s Up when FB pays $19Bn for WhatsApp. It redefines the meaning of, & method of, value creation…”

Over the past few weeks Microsoft surprised everyone by acquiring LinkedIn for over $26 Billion, a whopping amount by any imagination. Just a couple of days before this post was written, it became official that Yahoo was acquired by Verizon for just $4.8 Billion in cash, a paltry sum considering what Microsoft had offered to buy the company for in 2008 (over $50 Billion). At one point Yahoo was believed to be valued at around $125 Billion.

This got me thinking.

There are several theories around how the market valuates a company. However, they are just that – theories.

Here are my Two cents. Something that I’ve noticed is that the market tends to value a company based on its ability to “connect people”, so to speak. This could be in the social sphere or out in the marketplace. Companies like Amazon, Facebook, Google, WhatsApp, Instagram and even Alibaba have a very high social influence and are valued at several hundred Billions of Dollars (Yes, with a B), when combined. While these companies are indeed financially sound and are enjoying record profits, I feel that their valuation has little to do with their underlying financials or future prospects and more to do with their quotient to “connect people”.

This theory seems to have been further validated by the surge in stock prices of Nintendo after the release of the highly popular gaming app – Pokémon Go. The game leverages latest technology (VR, Location Services etc.) to bring people together and provide a platform for them to connect with each other.

Does this mean that “connecting people” (once an iconic slogan for an iconic company – Nokia) would become the only mantra for service or even product companies in order to gain high market valuation? Not necessarily. Sound financials, a viable business model and future growth opportunities cannot be disregarded.

Let’s take an example of an IT company. Technology today has been commoditized. All players within the market have it. Therefore, technological prowess, while important, doesn’t necessarily give you a major edge or influence market sentiment.  To drive growth, in addition to the standard financial and corporate measures that are critical in their own way, IT companies would need to focus even more on their products / services and drive their messaging to highlight the people connectivity aspect (within the organization or communities).

By highlighting that they are as much a part of social networking, the social fabric of communities, organizations and “people connectivity” as a Google or Facebook, companies could be in a better position to influence market sentiment.

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