Brief analysis of valuation in Fidelity's SEC Filings versus Workday S-1 valuations: Part 1
This article, along with a brief video, attempts to explain how Fidelity’s October 2011 investment in Workday grew at a 1600% CAGR while Workday’s common stock appreciated at a compounded annual rate of just 93% during the same period.
While both 93% CAGR and a 1600% CAGR are profound returns, the big issue here is the magnitude of the differences in valuation between what Fidelity’s SEC filings suggest as of the end of 2011 and what Workday’s 409A valuation implies for the same period.
It’s a difference of billions of dollars. But as Bambi Francisco pointed out when we were discussing this, “it’s not that there’s a huge difference in the values, it’s who is impacted by it if there is a difference.”
Limited partners in venture funds, like New Enterprise Associates, the 350 or so of Workday’s 1450 employees that hold vested stock options, tons of retail investors in Fidelity’s Contrafund and, ultimately, retail investors that purchase shares of Workday in the aftermarket following its IPO would all be impacted by such a large difference in valuations this close to a public offering.
Because of that, it’s important to clarify that this huge difference in valuation “appears” to exist, based solely on my interpretation of information filed with the SEC by Fidelity’s Contrafund and information filed by Workday in its registration statement. In this article, I’ll walk you through the disclosures and calculations leading to that interpretation with sufficient detail to allow you to draw your own conclusion. In two articles that follow I’ll walk you through how Workday made its valuation calculations and how Fidelity could have used similar valuation methods and still reached very different conclusions.
The starting point for the analysis is actually the Fidelity Investment’s Contrafund annually report for the year that ended December 31, 2011. In that report, Fidelity reports holding 1,223,783 shares of Workday valued at $29.98 million (or around $24.50 per share). This compares to the acquisition price reported in the audited financial statements from the same filing, which states a cost basis of $16.23 million for the Workday shares the mutual fund acquired on October 13, 2011.
Since October 13, 2011 matches the press reports for Workday’s Series F financing closing, and dividing the acquisition price reported by Fidelity by the year end shares equals the Series F original issue price recorded in Workday’s charter ($13.26) to the penny. Dividing the December 2011 value by the October value (then subtracting 1) suggests unrealized appreciation of 84.77% for Fidelity’s Workday investment over the 79 day period. An 84.77% gain over 79 days suggests a 1600% return as a compounded annual growth rate.
This compares to the valuation that Workday used to grant stock options, $4.25 per share in October of 2011 and $4.90 per share for shares granted in January 2012, based on their estimated December 2011 value. A difference almost always exist between the common stock fair market value determined for IRS’ 409A rules, and the fair value funds report their investors for the same companies.
Many times these differences reflect superior claims to the company under poor or mediocre sale scenarios, differences in valuation standards and, according to some, differences in objectives (higher value desired versus lower value desired). However, the issue here is not really that there was a huge difference in the values concluded, but rather the huge difference in the change in value over the exact same time period.
So what plausible factors help explain this huge difference?
In the next post, I’ll illustrate a few simple explanations, beginning with differences in assumptions concerning growth, differences in assumptions concerning the rate of return investors would requires and, as a result of those prior assumptions, differences in the expected volatility between what Workday’s board and 409A valuation firm relied upon and the variables Fidelity may have relied upon in reaching their value conclusion.