TAILIEUCHUNG - THE DARK SIDE OF VALUATION

In 1990, the ten largest firms, in terms of market capitalization, in the world were industrial and natural resource giants that had been in existence for much of the century. By January 2000, the two firms at the top of the list were Cisco and Microsoft, two technology firms that had barely registered a blip on the scale ten years prior. In fact, six of the ten largest firms1, in terms of market capitalization, at the beginning of 2000 were technology firms, and amazingly, four of the six had been in existence for 25 years or less. In an illustration of the speeding up of the. | The Comprehensive Guide to Valuing Technology Companies - s Dark Side of Valuation Valuing Old Tech New Tech and New Economy Companies A SWAT I ỉ DAMODARAN Copyrighted Material 1 CHAPTER 1 THE DARK SIDE OF VALUATION In 1990 the ten largest firms in terms of market capitalization in the world were industrial and natural resource giants that had been in existence for much of the century. By January 2000 the two firms at the top of the list were Cisco and Microsoft two technology firms that had barely registered a blip on the scale ten years prior. In fact six of the ten largest firms1 in terms of market capitalization at the beginning of 2000 were technology firms and amazingly four of the six had been in existence for 25 years or less. In an illustration of the speeding up of the life cycle Microsoft in existence only since 1977 was considered an old technology firm in 2000. The new technology firms dominating financial markets were the companies that use the internet to deliver products and services. The fact that these firms had little in revenues and large operating losses had not deterred investors from bidding up their stock prices and making them worth billions of dollars. In the eyes of some the high market valuations commanded by technology stocks relative to other stocks were the result of collective irrationality on the part of these investors and were not indicative of the underlying value of these firms. In the eyes of others these valuations were reasonable indicators that the future belongs to these internet interlopers. In either case traditional valuation models seemed ill suited for these firms that best represented the new economy. Defining a Technology Firm 1 The six firms were Cisco Microsoft Oracle Intel IBM and Lucent. Of these only IBM and Intel had were publicly traded firms in 1975. Microsoft went public in 1986 Oracle in 1987 and Cisco in 1990. Lucent was spun off by AT T in 1996. 2 What is a technology firm The line is increasingly blurred

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