Monday, September 26, 2005

For Sale?

With all the merger and acquisition activity going on at the moment it has set me thinking what exactly makes up the prices that are being paid. Anything has a value which is dictated by how much people will pay, simple supply and demand, but what elements are making up the prices people are paying at the moment.

The various methods of valuation are of course well documented, but there are so many synergy based valuations going on at the moment it is starting to look like the bubble is back.

For an agency, current clients is the obvious thing that people will pay for as well as historical performance, and profitability. All these things obviously have a value which would be fairly easy to put a total price on.

Value of kit is so easy now to work out that its probably taught in schools so that’s not an issue either.

What about the value of the portfolio though. This has the ability to demonstrate a track record in a particular sector and therefore open up new avenues for a prospective buyer. Surely though in the context of Interactive Media a portfolio loses value over time as work becomes less current. How should you measure that? It can’t be the same as on a piece of kit as that loses value to the point of zero but a portfolio has to be able to keep some value as it is work which has been done and therefore is a track record, which whilst it diminishes over time, is still relevant to some degree.

Surely that should be looked at in terms of the staff that created it and whether they are still there. A seasoned team that is used to working efficiently together has to have value as it is a well oiled machine capable of turning around projects quickly efficiently and (presumably) profitably.

This also begs the question about strength in depth and individual weakness within the team or parts of it. How much value is lost for instance if the design team is efficient but the technical team isn’t or visa versa. Is it as simple as just working out the percentage of billings and apply that ratio?

Finally what are the intangible elements. How much value can be allocated to the potential of a business in a burgeoning market. Similarly, is it right to put a price on things purely based on potential and isn’t this the same mistake that was made during the Internet bubble in 2000? Is speculation therefore always what its really about?

Random thoughts but worth me getting them down, even if it is only for later reference.

Edit. Unknown to me when I wrote this, my former colleague Alex Barnett has also been putting his thoughts down relating to the bubble and current valuations. He also has a few more links discussing the topic

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