Elaine’s, Skype and the Illusion of Value

Elaine’s, Skype and the Illusion of Value

This is a reissue of a blog I posted on May 18, 2011 at the NJ Society of CPAs’ website, but is still relevant, with some small changes.

Yesterday I read that the famous Elaine’s in NYC, and the restaurant of choice for Linda Fairstein, is closing. Last week Microsoft acquired Skype for $8.5 Billion, $6 Billion more than the seller paid for it 18 months earlier. And that seller bought it from eBay who took a $600 Million loss having purchased it from its founders in 2005 for $3.1 Billion. The company was formed in 2003.

This got to me thinking about what a business is worth and the illusion of its value. I am sure that most every customer of Elaine’s thought it was a gold mine wishing they could have a piece of it. Likewise, I am sure that eBay thought Skype was a “steal” at $3.1 Billion and two years later were glad when they were able to unload it for $2.5 Billion. (Note that eBay retained a minority interest so they just recouped their loss.) The “killing” was made by the venture capital group that sold it for $8.5 Billion to Microsoft who believed they got a great deal in buying it.

I perform many business valuations. Frankly, much of what I do represents a “scientifically” calculated value to fulfill a purpose such as for gift planning or estate tax purposes, employee compensation, or to present a value in a business break up or martial conflict. But none of the values are real – the real values are determined by an actual sale and then that value is valid only for that seller and that buyer at that time, for the terms negotiated, and because of the purposes, motives and pressures causing the sale. Perhaps a death compelled the family to sell a business quickly; or a business is sold so the owner could escape bankruptcy; or a buyer wants to get access to certain customers; or the key people working for a company offer to buy the business threatening to quit and start up their own company if it isn’t sold to them.

Stock market values are likewise illusory – solid companies miss earnings by a few pennies, or announce a bad year coming up and billions vanish overnight. A new CEO or a fired CEO similarly can cause wide swings in values. Staid established companies with well-known brands have likewise seen their values dissipate due to outmoded business models, backward or myopic managers or an inability to understand or adapt to how business has changed.

Much value is illusory. In planning for your future financial security understand this. When making investments of any type, don’t be deluded by current or immediate circumstances, but consider the long view and the potential for value creation, or destruction.