Interview question on valuing a tech company
Hi all,
Im a non finance major interested in the tech m&a sector and was wondering if someone could help me with answering the below questions I have, thank you. And also how you would structure these style of questions if they were ever asked in an interview. Thank you!
1) how would you value a tech company 2) how would you value a private tech company vs a public tech company 3) how would you value a SaaS vs Hardware vs Internet tech company 4) what differences in financials would you expect to find between a SaaS vs Hardware vs Internet company
1) depends on its stage, early stage = comps, later stage mix of comps and dcf 2) private, comps, depends on the vertical it operates in, adjust metrics accordingly 3) honestly not sure here, hopefully someone with more insight can weigh in 4) higher ARR/MRR vs hardware/internet
Right off the bat for #3 i'd do a comparable analysis if it's private. Think about multiples that current public competitors trade at and try to make some synergies.
TMT analyst here. These questions are way too broad, and a much better question would be how would you project revenues for all these different companies rather than how would you value them. In any case.
1) Tech company is a meaningless word because there is no feasible generalisation of what it means to be a tech company. A healthy number of tech companies are pre-profit, so any sort of earnings multiple or even DCF makes very little sense, and they are typically valued by EV/Revenue. A healthy number of tech companies are super stable cash cows, and then just about any valuation method works.
2) If you mean what's the difference in valuation, then it all boils down to the liquidity premium. A public company is worth more to shareholders because you can easily turn their shares into cash, which is a feature people are willing to pay for.
3) Same as 1. There's nothing inherently different between them, it all depends on the stability of the company.
4) This boils down to asset base and margins. Hardware typically has lower margins than the rest because of sizeable production, distribution, input etc costs. SaaS companies have lower margins than you might expect due to very high R&D expenses, typically 20% or so of revenue. Also some SaaS companies have very low asset base because they spun out their data centres into REITs, and some have very high ones because they have expensive servers or other network infrastructure.
Note that scalability runs both ways. As much as low marginal cost is great when you're trying to expand, it's very painful when you're contracting because your revenue is falling but costs are the same so your earnings are crashing.
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