People are bad at comparing large numbers. Anything past 100 and everyone’s eyes glaze over. One thing that I notice this a lot in is business journalism, ironically enough. We’re told what we should learn from different companies: what to do, what not to do, and how to think. Some business leaders are called visionaries, others are called disasters.
But we’re never given much of a basis of comparison. We get arrows pointing diagonally up to the right, telling us something’s increased over time, or arrows pointing diagonally down to the right, telling us something’s decreased over time. The scale matters, though. Comparing a large company’s victories with a small company’s victories is like talking about a brilliant NBA player versus a good high school basketball player. There’s a comparison to be made, but we have to be aware of where our comparison falls short.
As you know, I care a lot about how to think, and comparisons are part of that. When we report on business, we report on how most of the world spends its day, so it’s important to get our thinking right about business. To make things a bit easier, I’ve taken some of the top business news of the year measured by upvotes from the subreddit r/business. It’s of course hard to tell what an upvote means, but let’s assume it means that other people think we should pay attention to and learn from some piece of news. So let’s see how it goes.
So, here are the pieces of news: Mylan, the makers of EpiPen, is being asked to pay a $465 million dollar fine; Getty Images is being sued for $1 billion; marketing company SteelHouse gives their employees $2000 for vacation; Unilever buys Dollar Shave Club for $1 billion; Zynga is worth less than its office building ($2 billion including $1.5 billion in cash vs. $580 million).
Whew. That’s a whole mix of names and numbers. I think you’ve probably heard of all of the names except for SteelHouse. So how do we make sense of all of this? What do these pieces of news mean for our world? Should we all quit our jobs and work at SteelHouse? Is NBC going out of business? Is Zynga a failure?
|Name of company||Valuation||Cash on hand||Number in article|
|Mylan||2.515 * 10^10||1.2 * 10^9||4.65 * 10^8|
|SteelHouse||4.9*10^7||?||2*103*160 employees= 3.2*10^5|
|Dollar Shave Club||1.0*10^9||?||1.0*10^9|
|Zynga||2.0*10^9||1.5 * 109||5.8*10^8|
|You||1.4 * 10^5||5.0*10^3||NA|
Let’s get into it. First, apples-to-apple comparisons, to make this easy. We need to establish some common basis of comparisons. For valuation, I’ve chosen market cap or acquisition price, and for cash on hand, I’ve chosen cash and cash equivalents. A seasoned investor would have some difficulties with this, but it’s good enough for our purposes. For you, I’ve chosen that you have a net worth of $140,000, including your home and car, and cash in the bank of $5000. This may seem ludicrously low or high to you, but I think it works.
Now we can begin to get a sense of the articles. First off, Mylan was asked to pay $465 million in a fine. That’s about 50% of their cash on hand, or 2% of their valuation. This would be the equivalent of you paying a $2500 fine by either number. It would be rough, and definitely make you rethink some of your plans. You wouldn’t end up on the streets, though. Instead you might have to give up vacations for a couple years until you can rebuild your cash to a point you find comfortable.
Getty Images is being sued for $1 billion. That’s 3700% of their cash on hand, or 33% of their valuation. This would be the equivalent of you being fined $185,000 if we go by your cash, or $46,000 if we go by your valuation. If you were fined $185,000, you’d have to declare bankruptcy. Even if you sold everything you owned, it wouldn’t cover it. If you were fined $46,000, you’d almost certainly have to sell your house, or get an enormous loan against it. First option is certain financial ruin, second is probable financial ruin.
SteelHouse gives each of its employees $2,000 for vacation, and I found online that they have 160 employees. That’s a total of $300,000 they’ve spent on this program. They raised $49 million dollars in funding in their last round, so let’s say they’re worth $100 million. I don’t have a great reason for this assumption, because I don’t know how much of the company was valued at $49 million, but I’ll make it anyways. I have no way of knowing how much cash they have. Given these uncertain numbers, their vacation program has cost them 0.3% of their valuation. That’s the equivalent of you spending $400, based on your valuation. That’s an amount that you shouldn’t throw every weekend, but its disappearance would not make any difference in the trajectory of your life.
Unilever spent $1 billion acquiring Dollar Shave Club. That’s 33% of their cash on hand, or 0.7% of their valuation. That’s the equivalent of $1650 going by your cash, or $980 going by your valuation. Pretty similar to the Mylan story: that’d be your big purchase of the year, and maybe of 2 years, but that likely wouldn’t matter beyond that.
Finally, Zynga is worth less than its office building, when we don’t include its cash on hand. Its office building is worth $580 million, while its valuation excluding cash is $500 million. That’s not really a proper financial calculation, because we have to consider its debt as well, so I’m not going to go by their calculation. Instead, we’ll compare $580 million, to $2 billion valuation, to $1.5 billion cash. So, its office building is 39% of its cash on hand, and the office building is 29% of its valuation. That’s like a property you own being worth either $1950, if we go by cash, or $40,600, if we go by valuation. Obviously, there’s a big difference there. A property you own worth $1950 is something you’re probably looking to sell, while a property you own worth $40,600 is something you’d want to pass down to your kids. It’s not crazy to own a property worth either amount given your financial circumstances, but you would think about it differently.
Now that we’ve gotten our comparisons done, let’s rewrite these headlines:
“Mylan is forced to pay a fine that will make it rethink near-term plans, but will not be devastating otherwise”
“Getty Images is being sued for an amount that would almost certainly end it if the lawsuit worked”
“SteelHouse has put a small amount of money towards a somewhat silly vacation scheme”
“Unilever has likely made its big purchase of the year”
“Zynga has way too much cash, given the size of the rest of Zynga. They should do something about that.”
This isn’t the only way to think about these amounts or these news headlines, but it is a fair way. Otherwise, we’re left with all these numbers that are impossible to think about. Our minds glaze over, and journalists can sneak in and tell us stories without us examining them critically.
This question about how to think about companies is an interesting one. While I’ve approached it here just as an intelligent way to think about the news, other people think about it for their daily bread. In my next essay, I’ll be discussing two different ways of valuing companies: the Grahamanian model, and the startup model. Stay tuned!