Sobota červenec 19, 2008

Why is Sun Missing in Top 500?

Financial Times, the leading British business newspaper, has published a chart of the world's 500 largest companies called FT Global 500. The most valuable company is Exxon Mobil, with PetroChina in the second place pushing General Electric to the bronze position.

All major competitors of Sun Microsystems took their positions in the chart (IBM #27, HP #48, Dell #183), but Sun is missing. To answer the question "Why is that?" you must first understand what's the methodology behind.

You don't need to be an economist to know it must be pretty tough to tell if a company deserves to be in the top 500 or not. However, the editors of Financial Times found a very easy and objective way to do so: they sorted the companies according to their market capitalization as of March 31, 2008. Market capitalization is the share price multiplied by the number of shares. All numbers were converted to the dollar by using the exchange rate of March 31, 2008.

Market value is therefore the actual price of the whole company. But the share price doesn't value the company at some point of time, it also includes the expectations of the investors, because they expect Sun to execute on its promises in the future. Accounters call this the principle of going concern.

To compare Sun with other companies (and to see why Sun is not in the list of top 500), we must calculate the market capitalization as of March 31, 2008. The share price (NASDAQ:JAVA) closed at $15.53 that day, while the number of shares is 781,784,000 (taken from the latest annual report). By multiplying these two numbers, we calculate that Sun's market capitalization was $12,141 million on March 31, 2008.

If Sun's value was only $12M, does it mean that it's worse than the top 500 companies? Well, I don't think so. Let me give you an example: is Mercedes worse than Ferrari just because it's cheaper? No, it's not. We can say that it's a different class.

And that's exactly the difference between Sun and it's competitors. IBM, which ranked 27th in the FT Global 500, has 11 times more employees than Sun and had 7 times bigger turnover (amount of products and services sold) in the last fiscal year. That's a big gap which describes the size of the organization and it's another factor included in the share price.

As the amount of outstanding shares does not change often, the only dynamic part of the market cap is the share price. Henkel, the German household goods producer, was the 500th on the list with $19,331.2M market cap. Sun's share price would have to be at least $24.72 to get the last place in the list.

— VII 19 2008, 12:23:30 dop. CEST Permalink