From the monthly archives: October 2010

We are pleased to present below all posts archived in 'October 2010'. If you still can't find what you are looking for, try using the search box.

Should We Value Intangibles? How?

Compare the balance sheets of three companies: Pacific Gas & Electric, Wal-Mart and Google.  You’ll find that the assets listed by PG&E and Wal-Mart provide a fairly accurate indicator of what these companies do.  Power plants account for more than two-thirds of PG&E’s assets.  Stores account for more than half of Wal-Mart’s assets, followed by inventory (20%).  Now take a look at Google.  Cash accounts for more than half its asset value.  Property and goodwill each provide for about ten percent of Google’s reported assets.  Is Google a bank?  Nowhere on its balance sheet does it list its proprietary technology, its customer base or its universally-recognized name. When we talk about valuing intangible assets, we’re not talking about assigning value to a will-o’-the-wisp.  Does anyone doubt that Google’s technology is valuable?  We need to value intangible assets because the economy has changed.  Ba ...

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Changes in the Value of Common Stock

One reason it’s difficult to value common stock in a venture-backed company is that the value of common is more volatile than the value of equity.  A small swing in equity value, up or down, can trigger a much bigger change in the value of common.  If we’re valuing equity based on market multiples, which change every day, the value of common is likely to bounce around. The volatility is the result of financial leverage, the same phenomenon which contributes to higher earnings and losses in companies financed with debt.  Unless equity value is high enough to trigger conversion of preferred, the preferred liquidation preference is like debt.  Equity value may increase by a small amount, but if it all flows to common with none to preferred, the effect on common value can be dramatic.  To illustrate, assume a venture-backed company is capitalized with 1,000,000 preferred shares and 500,000 common shares.  The preferred liquidation preference is $10 per share, so the pr ...

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