We Need a New Theory of Value and Wealth
It ain't all about the EBITDA, stupid!
“…and therefore, our group is now the most important player in the field!”, concluded the C-something-O (everyone here is Chief-something-Officer. I petitioned to change my title to Chief Jiujitsu Officer, but have yet to hear back from HR).
I’ve been around companies for a while now, and one of the most fastidious tirades is the old “we’re the leaders in the market of whatchamacallit”. First of all, that means diddlysquat, since everyone out there is boasting they’re the leaders of whatever. You can always find a sliver out of all your business process where you’re the best. Nobody cares. Second of all, because everyone is claiming to be the “leader”, the word has lost all meaning, especially for prospects who know how this game works.
How Do We Measure Value in a Company?
Many of the companies I’ve been in tend to talk about their value in terms of EBITDA or «earnings before interest, taxes, depreciation, and amortization». As everything businesswise goes, this is just a fancy word to describe something very simple. EBITDA just means how much money you’re making. That’s it. But if we say “Money Made” instead of EBITDA, then everyone understands and business people suddenly don’t look as smart as they think they are. Every “tribe” or group codes its world-view to exclude outsiders and create an intrinsic culture, like Sociologist Harold Garfinkel or even Pierre Bourdieu showed. When you hear some douche in a suit talk about “financial optimization to accrue R.O.I. by eliminating resources and increase EBITDA” all he’s saying is people are going to get fired. It’s not more complicated than that, but it really sounds scientific when this consultant in a three-thousand dollar suit says it, innit?
Where is The Love Wealth?
When companies merge (or are acquired) a standard measure of “value” is adding both EBITDAs together. If company A makes 2 dollars, and company B makes 3, then group AB makes 5 dollars, the theory goes. This is where I have a bone to pick.
Now, after an extensive search on Wikipedia and Youtube that lasted about 5 minutes, I can confidently say absolutely no one in humankind has come up with this idea: the value of the company is not the same as its wealth. Going around adding EBITDAs and reading numbers off an Excel file does not represent the actual wealth (or lack thereof) in the company. This is not groundbreaking news, and pretty much everyone knows this. So why do we keep up the EBITDA charade? Because it serves the interest of the investors, who are solely focused on value not wealth.
When you see the valuation of a company on the stock market, this doesn’t represent the EBITDA at all. Elon Musk made billions of dollars when Donald Trump won, not because Tesla suddenly started making billions of dollars in profit by pumping out new cars. The value of his stock went up, pocketing him billions (in a sense). The wealth-creation remained the same or, in the case of Tesla, actually went down.
How Do We Measure Wealth?
Merging two different companies is not an easy task. I can confidently say that I have never, ever, been in a company where this was done smoothly. It’s always been calamitous, a catastrophe of epic proportions, a disaster. I know you should in theory call a “Transition or Change Manager” when you merge two entities, but the guys I worked for obviously didn’t get the memo. So one day you’re in an office full of people you know, the next, you’re surrounded by a bunch of moping dudes angry they got bought out and blaming you for this.
The “mergers” I’ve witnessed have always been decreed, Maduro-style, from above. Some holding company or investor lead by sociopaths in suits looked at company A, which made Widget X, and company B, which also made Widget X, and said, “Let’s merge A and B so we can become the market leaders of Widget X!”.
Sure, pal. I’m sure that looks great on paper and that you were congratulated after doing your Powerpoint presentation in front of the board members. The problem is, we, the people on the ground, aren’t having such a peachy time. Yes, the value of the company has gone up since you added both EBITDAs. But the wealth creation process of both companies has taken a hit.
How Much Are We Worth?
Building teams inside a company is a very precarious endeavor. Personalities differ, goals differ, temperaments differ. It’s very difficult to structure a well-balanced team with colleges that actually like and respect each other, who are also good at what they do and want to work together.
Destroying teams, on the other hand, is very easy: just merge with another company and watch everyone go into Lord Of The Flies mode. Congratulations: your shitty merger just made Y person resign, and you know what? She always brought croissants, was super cheerful and loved by everybody. Our team lost Y and now morale has plummeted. People start filing for sick days more. They leave early. They start complaining. Nobody seems to want to eat croissants and chat in the morning, anymore. So your wealth creation capacities suffer.
We need an economic theory capable of putting figures on this aspect of business, which is (or used to be) the most central aspect. Without it, we’re selling investors fool’s gold: look at group AB, leaders in the market of Widget X, with a combined EBITDA of all these millions. Sure, buddy. Let me just sit back and watch your “EBITDA” crumble when half of the product team resigns and your offer starts to become mediocre.
Now, since I have a PhD in language philosophy and two masters in sociology and philosophy, I’m obviously the best person to come up with a new mathematical formula. As soon as I go over my sixth-grade algebra again, I’ll post my E=MC2 solution here… More seriously, this rant looks to point at the obvious fact that there are so many (too many) qualitative measures inside a company that we’re not taking into account! I can confidently posit that these “soft skills” or whatever you want to call them, are more important than putting figures on an Excel to try to assess value.
Let me finish with an example. Every semester we have to go through this tortuous process of measuring “Objectives” and “Goals” which is mostly done through Key Performance Indicators, or KPIs. It’s silly, useless: my manager knows it, I know it, but we still do the dance and figure out how to put some numbers on there to kinda reflect something about my work. So everything I do, all the impact I may have, is reduced to these set of numbers and that’s supposed to ascertain value. Chart number go up, good; number go down, no good. That’s work.
The irony is that everyone here knows my real value, and they’ve already decided I need to stay (for now). How do you gauge a trilingual philosopher with extensive knowledge in fields such as Psychology, Photography, Movie Editing, Event Organizing and Publishing, among others? Not to brag, but if I’m around during lunchtime, conversations are going to get interesting. Did I tell you about the time I got chased by a monkey in India? Have you heard my theory about how the pyramids were built? Wanna exchange cooking recipes or talk about the Palme d’Or? Did you know I was an extra on a movie with Pierce Brosnan and Emma Watson? Wanna talk about sports? I’m your guy!
I honestly feel that until we factor in these variables, which again, are much more numerous and important than my “productivity”, we won’t be able to transcend the “eternal growth” model based on perceived value decoupled from wealth that frankly, just isn’t working.