A True Value

Reader discusses current ISP valuations.

[Response to Subscriber Values from March 25, 2005.]

[March 25, 2005]

Hello:

Iīve seen that the method being used to calculate Subscribers value is:

Subs Value = Market Cap / # of subs

Technically, from a multiple-valuation analysis, one has to use "Enterprise Value" (or "Firm" Value) in lieu of Market Cap. The difference lies in adding the net debt ( debt minus cash) of the company, for the simple reason that, if you buy 2 companies for US$100 million each but one of them has US$200 million in debt (and no cash), you are actually paying US$300 million for it. Failing to include the debt may lead to gross distortions on the subscriber value.

Thanks,

Marcelo Mollica

Thank you for writing,

Were you simplifying the concept of "enterprise value"? Are there other factors that also have to be measured and then added up?

Alex Goldman
Managing Editor, ISP-Planet

Hello:

Well, to be very technical you should look at "free" cash, meaning the cash that could be distributed to shareholders ( = not needed for operating activities, like working capital cash), but in reality nobody does that. Also, when looking for "cash" in the Balance Sheet, remember to add "marketable securities" or similar very liquid investments. In the "debt" side, a point of possible doubt could be the definition of what is debt and what is not (typically you take bank debt, loans, bonds, commercial papers, etc..., in general what pays interest). Apart from these details, itīs as simple as that.

Thanks,

Marcelo Mollica

Thank you for writing,

We certainly need to examine the debt levels of the companies in the subscriber values list and in our ISP rankings. Perhaps we will compile a list of ISPs with high debt levels, and call it the Debt Watch.

Alex Goldman
Managing Editor, ISP-Planet