HN Explorer

Ask HN: Why do companies care about their own valuation?

13 points by vpoulain ↗ HN
As far as I understand company IPO allows to raise huge amount of money. Once they raised this money why do they care about share value on a daily basis? This valuation is different than cash flow and considering it too much deeply impact long-term strategy, no?

15 comments

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BOOSTERHIDROGEN
Same thing with stock market, I couldn’t understand that people swapping stock amongst themselves. No money going into productive use
blueterminal
You buy a portion of the business. Why wouldn't you want to do that if you have some cash and see a nice deal? It's a beautiful system.
blueterminal
Imagine if you're the CEO of the company and you own 100000 shares of it. Then your net-worth between 100$/share and 120$/share will differ by $2 million. Quite a difference, isn't? And I think most board members hold certain amount of company's stock, and usually most people want their net-worth to grow as much as possible, so they try to do certain things to increase the stock price.

That's one of negative things about stocks in general in my opinion, because people quite often have short-term (lasting a quarter or two) outlook.

shoo
Same argument is also possible if the CEO/board/other insiders have a decent chunk of their net worth as options for the company stock. But in that case, the increase in insider net worth can be highly nonlinear as a function of the price of the company's share price.
pmiller2
> That's one of negative things about stocks in general in my opinion, because people quite often have short-term (lasting a quarter or two) outlook.

That could be easily fixed by requiring all executive and board members' stock to be held for, say, 3 years after vesting before selling.

lberk
Has it really vested at that point then?

Or is it just a longer vesting period?

bruce511
I guess that depends on your understanding of "vesting" - and my understanding may be faulty.

As I understand it, if I leave the business before the vesting I get nothing. When the stock vests it becomes mine.

A lock down of the stock then means I can't trade it, but it remains mine (regardless of whether I stay or leave.) Once the lock is lifted I could sell it.

So in that sense there's a difference, yes.

vpoulain
I mean that making money with public stock market make hardly sense for me. It is not correlated anymore with the value you can bring.
shoo
Another angle to think about is the opportunity the company has to raise additional capital after IPO. All things equal, if the share price offered by the market is higher, it is cheaper for the company to raise additional capital by selling additional equity. The company will usually also have an alternative way of raising capital by taking on debt rather than selling equity.
cbanek
Since equity based compensation is a large part of many equity packages, if the stock price was falling or at least not rising, that would be a reduction in salary. Companies like equity based compensation because of tax benefits and it generally seems cheaper since they can always issue more stock.
pixiemaster
It’s a feedback to the CEO how good their company is. Buy putting a price on it (valuation), she/he gets feedback on how she/he is contributing to value increase.

in theory this factors in all aspects, e.g. more than just revenue, because it’s a comparison with other companies as well.

reality IMHO: it’s bullshit to manage short term valuation only.

badrabbit
Loans,future investment loss, dividend loss to shareholders,C suite bonus and job performance is measured by this,etc...

You wouldn't want to give business to a company that has been losing value continually right?

TheCoelacanth
Shareholders care deeply about valuation because it puts money in their pocket when the valuation rises.

Shareholders are the CEO's boss.

[dead] Astraport
Publicly traded companies place great importance on their stock share price, which broadly reflects a corporation’s overall financial health. As a rule, the higher a stock price is, the rosier a company’s prospects become.
carloshpf
The main reasons have already been mentioned.. compensation, feedback to the CEO, etc.. but an interesting one that I just saw, and I don’t know if it’s possible, appeared on the TV Show Succession (HBO) where the family's stock in the company (which they control but not by much) secures a loan that the lender can call if the stock drops below a certain price.