Tech giants struggle to put a price on the future

This fear of being left behind drove the buying spree by HP, founded by two
graduates at California’s Stanford University on the eve of the Second World
War. Few disagreed with the logic of buying Autonomy, whose software helps
companies search the growing pile of unstructured data – such as emails and
voicemails – that society produces. It was a way to reduce HP’s reliance on
PC sales, which fell 1.4pc in the final three months of last year.

But many on Wall Street balked at the $10.3bn HP handed over to Lynch and
Autonomy’s other shareholders. It was a 59pc premium to where Autonomy’s
shares had been trading.

HP shares crashed the day after the deal was announced and within a month Leo
Apotheker, HP’s then freshly installed chief executive who engineered the
deal, was out. Just a year earlier HP had paid $3.25bn for 3Par, a data
storage company. This was the equivalent of 325 times the company’s
earnings, according to Bloomberg.

It was fear, not greed that prompted HP to write such large cheques. And if HP
is finding it increasingly difficult to put a price on the future,
Facebook’s flotation showed investors are not finding it any easier.

Technical glitches on the Nasdaq and allegations – strongly denied – that the
Wall Street banks advising Facebook made selective disclosures to investors
about the company’s prospects did not help the share price. It closed last
week 16pc lower than the float price.

For those who were always sceptical of the $104bn valuation the IPO gave
Facebook, what really unfolded last week was the dawning on investors that
they had paid too much. Aswath Damodoran, a professor of finance and
valuation specialist at New York University, says the flotation repeated a
mistake that had been made before during periods of intense technological
change.

At such moments there is a recognition that people’s habits are being reshaped
by major technological change. But the frequent mistake, argues Damodoran,
comes in taking the appreciation that things are fundamentally shifting and
channelling too much of it into the valuation of the companies bringing
about that shift.

“How do you know if Facebook is going to be the big winner,” he
asks. “Collectively we have got the macro right but have not
transferred it to the micro valuation.”

This weekend is likely to have come as welcome respite to Zuckerberg and his
top lieutenants after a torrid first week as a public company. The irony,
though, analysts say, is that Facebook in many ways now faces the same
predicament as HP.

Yes, Facebook’s 900m users and $1bn of annual profits dwarfs other social
media companies. But, as Zuckerberg is acutely aware, less than a decade ago
it was Facebook that had just a handful of employees and appeared little
threat to established giants such as Yahoo! and Microsoft.

The 28-year old’s appreciation of how rapidly the ground can now give way
under companies was underlined last month by Facebook’s $1bn acquisition of
Instagram, the developer behind an app that allows users to share photos on
their mobile phones.

As Instagram has amassed more than 30m users since it was founded in 2010,
there was clearly some value for Facebook in keeping it out of the hands of
rivals such as Microsoft or Google.

But Facebook paid the equivalent of $76.9m for each of the 13 employees of
Instagram, which hasn’t made a profit. “There is a bubble in app
developers,” said Michael Pachter, an analyst who covers Facebook at
Wedbush Securities.

With the volume and popularity of apps exploding, few expect Instragram to be
the last deal as change forces even Facebook to keep an eye over its
shoulder. HP knows what that feels like as well.

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