Valuation of social network companies with the example of Facebook

Abstract

Company valuations are determined my markets and are used in assessing financial health of companies, even if they are wrong. Investors suffered heavily because of faulty valuations in 2000, and since then with limited number of internet IPOs, required information has become scarce. Internet companies (and in particular the social network sites) are presently illiquid private investments and hence valuing them is much more difficulti . Several companies (investors) admitted that they overpaid while acquiring internet companies. Examples are: Acquisition of Friends reunited in Dec 2005 for $125m by ITV iiand that of Myspace by News Corp for $580miii In recent months internet social network companies like Facebook, Twitter and social gaming firm Zynga are valued worth many times their expected revenue in coming year. With Facebook valuation being $50 billion, twitter- $8-10 billion and Zynga- $7-9 billion!iv It is really intriguing and exciting to find out what made Goldman Sachs to value, a firm whose business model is yet to be proven, worth more than established companies such as News Corp. In light of these investment opportunities, it is very important to answer questions like: How to value social networking sites? Are there any relevant models? How can investors save themselves from overpaying for investments because of faulty valuations? Etc. This report tries to answer these interesting questions from the valuation world. Objectives: * To appreciate the difficulties in valuing social networking sites. * To find out the drawbacks in applying traditional valuation models. * To determine additional factors to be considered while valuing this companies. * To determine the model for quantifying these factors, this can guide us to value Facebook (the largest social networking site)