6. Fundamentals
Three Basic Valuation Events
1) Raise money from private investors.
2) Go public and sell stock on an exchange.
3) Sell the company.
7. Fundamentals
Discounted Cash Flows Method
Comparable Company Method
8. Fundamentals
Discounted Cash Flows (DCF)
• Today’s value of a future stream of cash flows
• “Discounted” to adjust for time & risk
• Discount rate reflects buyer’s cost of capital
(investment return)
• Highly dependent on good forecasting,
accurate discount rate (“garbage in, garbage
out”)
9. Fundamentals
Comparable Company
1) Identify competitive sector
2) Determine relevant metrics
3) Assess relative value
10. Fundamentals
Many Factors Affect Value
• Management & team
• Intellectual property & technology
• Scarcity / uniqueness of asset
• Defensibility of market position
11. Fundamentals
Marchetti’s Three Laws of Valuation
1) Value is established only by what someone
is willing to pay for an asset.
2) Valuation is always about the future. It’s not
about what you are “worth” today but
what’s expected of you tomorrow.
3) If someone is willing to value your company
by a metric other than discounted cash
flows, SELL!
13. The Real World
Rules for Enhancing Value
• Understand what creates value in your niche
• Seek to own or control your value-rich assets
• Manage for long-term competitive advantage
• Strive to be #1 at what you do
14. The Real World
Why do companies buy?
• Growth
• Market Entrance
• Exclusivity
• Intellectual Property
• Talent
15. The Old World
Packaged Goods Value Chain
Develop. Owned
Middleware Distribution Publishing
Capacity IP
16. The New World
Game LiveTeam
Dev. & IP CRM
Tools & Virtual
Tech Goods
Billing
Network
& Ads
Ops
Distrib- Cust.
ution Acq.
17. Strategic Value
Blue Ocean vs. Red Ocean
• Blue Ocean strategies are worth a
significant multiple over Red Ocean
strategies
• Red Ocean companies are easier to
value against comps; have lower
likelihood of break-out success;
generally lower margins
18. Strategic Value
Beyond the Blue Ocean
• Market share & aggregation
• Barriers to entry
• Growth vs. cash flow
19. Strategic Value
Distribution Innovation vs.
Content Innovation
• Content innovation drives
audience expansion.
• Distribution innovation drives
value creation.
20. 1992 2004
Revenue $300 million $3.1 billion
Market Value ~$250 million ~$15 billion
21.
22. Strategic Value
Recent Distribution Innovations
• iPhone
• Social Gaming
• Free-to-Play + Virtual Goods
• Used Games / Resale
23. Examples
State of the Traditional Buyers
Δ
1/3/06 1/2/09
ERTS $18.2B $5.6B -69%
MSFT $240B $178B -26%
THQI $1.8B $305MM -83%
VIA-B $26B $12.2B -53%
