Yahoo: 38x more employees than Facebook
Yahoo: 32x more revenue than Facebook (estimate)
IBM: 8x more revenue than Google
IBM: ? more employees than Google
IBM has 27x more employees than Google, something like 355,000 worldwide. I'd say that offers a rational explanation for why Google's stock is worth more. Google has more room to grow.
"The upward valuations pressure is the result of decisions being made by people wearing suits in cities like New York and Boston who would never ever meet with start-ups"
Really? Aren't most of the big acquisitions being done by EBay, Yahoo, and Google?
I think he's referring more to the flood of investment dollars at high valuation rather than acquisition at high valuation. The suits are the managers of Harvard's endowment and the like; their desire for returns creates a large supply of venture financing which increases the demand for startups to park the money in, driving up valuations.
That's a separate issue (sort of) from whatever forces are driving the acquisitions; apparently web startups are in high demand with acquirers and they getting in bidding wars driving up the price. The (sort of) is that the high demand for startups creates the large returns the endowment money is chasing in the first place.
So, fundamentally, I think either 1) startups are creating vast amounts of (expected) wealth and people just aren't used to seeing mostly expected wealth divvied up in public or 2) the EBays, Yahoos, and Googles of the world are acting irrationally.
The acquisition issue is related in another way: endowment money is also flooding into the publicly-traded stock market, which drives up the stock price of these large acquirers. They have an incentive to trade their overvalued stock for tangible products that increase the value of their business.
It's a bubble, but it's a bubble where everyone is acting rationally. Pensions & endowments and other institutional investors have an incentive to purchase these overvalued securities and ever-inflating prices because the value of their cash will drop through inflation. Large acquirers have an incentive to trade their overvalued stock for successful companies under "buy low, sell high". VCs have an incentive to invest in more startups at higher valuations because acquisitions are being made at higher valuation, plus they need to put their investment capital to work. Entrepreneurs have an incentive to found more startups, to capture this investment- and acquisition-money. The ultimate cause is the Fed, which is flooding the economy with money and driving the value of cash down.
BTW, this is how capitalism is supposed to work (except possibly the part about the Fed). Textbooks recognize 3 factors of production - land, labor, and capital - and I'd add a fourth, entrepreneurship, responsible for turning those three into products that satisfy consumer needs. Right now, land is cheap (relative to farming days), labor is cheap, and capital is cheap. The limiting regent is the supply of people with good ideas for turning capital into useful products. In economics, when there's a bottleneck in the value chain, it pushes the returns for that industry up. That's what's happening now, with average returns for entrepreneurs being much, much higher than for the general labor force. As more people found startups, it should equilibrate, so that the returns for entrepreneurship are only the difference between their productivity as entrepreneurs and their productivity as employees.
If history is any guide, it'll last until enough wealth gets concentrated in the entrepreneurial class that the ordinary labor force starts thinking of itself as oppressed and hopeless. Then it usually ends in Depression, war, revolution, or some other major event that kills a lot of people.
