On the heels of last week's post about the Health of the Public Technology Market, Felix Salmon asked the thought-provoking question above. Despite the 68x growth in the value of technology market caps since 1980, are newer average technology companies worth less?
The average public tech company value has falled by more than 2/3rds from $4.3B in the early 80s to $1.4B today, as measured in 2014 dollars.
Why is this the case? The industry has fragmented and players are pursuing smaller and smaller market opportunities, decreasing company size. The first technology companies were industry creators, monopolizing transistors and mainframes. In 1981, IBM was worth about $100B in 2012 dollars and represented 76% of global IT market cap across 28 companies. Total domination.
As the industry grew by orders of magnitude, the typical tech company pursued smaller market opportunities with less market power, commanding lower revenues and consequently smaller valuations. So, the average tech company began to look much more like the average publicly traded company than the monolithic forefathers of the industry. Today, the average publicly traded tech company is about 60% smaller than the average company on the Nasdaq.
The data supports this theory. The chart below shows the distribution of IT market caps over time. These publicly traded companies’ market caps fall into a normal distribution, clustered around $1.4B.
I suspect this trend will continue until significant consolidation takes place, which is quite likely. Microsoft has $80B in cash; Apple, Google and Cisco each have $50B. With all that cash and growth paramount in importance, tech M&A in both private and public companies should be quite vibrant over the next few years.