There’s a story on TechCrunch today on how Microsoft’s market value exceeded Google’s market value. I don’t know if this is news, but I suppose it’s interesting to check in from time to time on how the public markets perceive the two tech giants.
What caught my eye were two comments from those claiming to be from two prestigious venture capital firms: Accel Partners and Silver Lake Partners.
Here’s an angry one from Han Lee, Accel Partners:
Dear writer, do you really not know the difference between market cap and enterprise value? Pathetic.
From Jeff Schnabel, Operating Executive at Silver Lake Partners:
Total enterprise value is a more accurate measure of a company’s value (market cap is only a piece of the puzzle – the value of the company’s publicly traded equity).
If you look at TEV, Google is still worth more than Microsoft ($306.4B vs. $290.4B)
What is Enterprise Value and how’s it different to Market Value you may ask? Finance people love to confuse lay people to make themselves look smarter, so let’s peel away the jargon.
Generally, there are two sources of money for a company. The first is equity, which is when a company asks people to invest in their company in return for shares, or when the company reinvests cash from company profits. Market Value is the best proxy for equity. You might invest $100 into a company, let’s say as the only shareholder, and hope that $100 returns $1,000 whether through stock price increases or dividends.
Another source of money is to borrow. When you borrow from say, the bank, the bank doesn’t technically own your company. They are not a shareholder, they are a debt holder. So let’s say the company borrowed $100 to buy machines.
The starting Market Value would be $100 and the starting Enterprise Value would be $200. As you can see, Enterprise Value is a more useful way to describe the size of the business, because it captures the company’s assets as made possible via shareholding and debt.
But it’s also not the best way to describe the value of the business. It’s easy for a company to artificially increase its Enterprise Value. Just borrow more money and spend! Unfortunately, that doesn’t mean the company is necessarily more valuable. For that to happen, the assets purchased with the cash from that debt has to eventually translate into profit, which is then reflected back into Market Value anyway.
So, it may be fair to say that Google’s total value is larger than Microsoft’s, and that Microsoft’s shares are more valuable than Google.
Put another way: which company would you rather own? According to the stock market – somewhat surprisingly (to me anyway) – that company is Microsoft.