“A value is valuable when the value of value is valuable to oneself.” – Dayananda Saraswati
What is something worth? For many, this is a simple question with an easy answer: whatever somebody is willing to pay for it. In practice, valuation is critically important to the core functioning of finance over the long run. How value is determined – and who gets to do the determining – can make the difference between fortunes won and lost. As with all such circumstances, if there is big money on the line, there will be people with the means, opportunity, and motive to stretch the boundaries and grab more than their fair share of it.
In the public stock markets, valuation seems straightforward. Stocks trade hands between willing buyers and sellers during market hours, and when the markets close there’s a final trading price for the day. But things aren’t always so transparent. Imagine you are a money manager with a large position in XYZ stock. It is somewhat illiquid in that it doesn’t trade in big volumes. Since your compensation depends in part on the closing value of XYZ on December 31st, you decide to make a series of small buys in the last few minutes into the close, artificially pushing the value of XYZ up by 5%. Your entire stake now gets marked there, but it isn’t real - you have merely “painted the tape.”
If a founder sells 15% of her startup to an accredited investor in exchange for an injection of $150,000, then it might be fair to say her company is worth $1 million. What if it is the founder’s parents making the investment? A best friend? A business partner in a different but related venture? Throw into the mix critical deal terms like distribution preferences, board seats, voting rights, anti-dilution protections, and other negotiated concessions, and it quickly becomes apparent how difficult the concept of private value can become – and how easily it can be manipulated.
Things get really interesting when the public and private company worlds collide, and no person has pushed the envelope harder at this interface than Masayoshi (Masa) Son, Chief Executive Officer of SoftBank. SoftBank is a large Japanese conglomerate consisting of run-of-the-mill operating companies and a staggering array of aggressive private investments deployed through all manner of complex structures, often with significant leverage.
Known as a swashbuckling gambler with an incredible tolerance for volatility, Masa Son is famous for his bizarre investor presentations during which he rails against the value the public markets assign to the whole of SoftBank, especially compared to what he believes is its proper sum-of-the-parts valuation. Below is a famous moment from his 2020 presentation, delivered at the height of the Covid-19 pandemic, during which Masa Son claimed SoftBank’s equity was worth 25 trillion Yen, yet the market was assigning it only 9 trillion Yen (on the slide, he’s backing out the 4 trillion Yen in SoftBank debt).
https://doomberg.substack.com/p/crouching-tiger-hidden-problems
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