Valley of the kings
The tech world of Silicon Valley is an odd and confusing place that is often hard to put into traditional financial context. With a resurgence of VC funding and IPOs that rivals the influx seen in the 2000 dotcom bubble, some worry another bubble is starting to form. Chronically low interest rates and equities at all-time highs mean cash is cheap and plentiful and burning holes the pockets of large tech companies. Not just in new technology and acquisitions, but in something more physical and permanent – lavish new headquarters. But is this the wisest use of capital? The Economist recently published an article detailing some of the concerns with these new expensive buildings – and also made some cautious parallels with the dotcom boom in the late ’90s.
Building new headquarters as a symbol of your success isn’t a recent development. One infamous example is the Pan Am building in Manhattan. Built in the 1960s, Juan Trippe famously signed a $115M 30-year lease which included $1M or 10% equity stake in the property. At the time it was the largest commercial lease ever signed for a building in Manhattan and in line with Juan Trippe’s massive ego, the building had 30ft “Pan Am” logo erected at the top. At the time Pan Am seemed poised to dominate the airline world – it had recently purchased a fleet of new jets and was about to take delivery of the largest airliner in the world, the 747. But as deregulation took hold and the company struggled under unionization and poor management, other airlines stepped in and began eating away their business. In the last days of the airline, Pan Am was forced to sell its stake in the property as it was drowning in red ink and relocated its headquarters to Miami. Another prominent example is the iconic Sears Tower in Chicago. Completed in the early 1970s, the Sears Tower was designed to consolidate office space for Sears as well as become an iconic symbol for the retailer. Unfortunately Sears’ growth did not line up with its forecast. With pressure from other retailers the building remained mostly vacant as other cheap office space flooded Chicago. Eventually Sears left the building entirely in 1995 and today the building no longer even bears its name. The is just a sampling of corporations that, at their apex, decided to show their success by putting a stake in the ground and erecting massive monuments in their name – history is littered with many more.
Recently there has been an eerily similar comeback in headquarters planning. On February 27th, 2015, Google submitted a proposal for permission to build an even larger headquarters than its current “Googleplex” in Mountain View. Google isn’t the only tech giant looking for new digs. Facebook, Apple, and Amazon all have plans for extravagant new office spaces. These examples are more of the exception than the norm and firms like Google and Apple have ample amounts of cash on hand to bankroll these large capital investments. But for other small and medium sized companies and startups looking to keep up with the Joneses, building or moving into a new building just to impress investors or clients can be fatal. Buildings should always be considered overhead and never an investment, and when a company decides to make a move it’s a good idea to take a hard look at their performance and core business. Even for Google and Apple, a strong argument could be made this money would be better spent elsewhere, or better yet given back to the shareholders.
So what does this mean from an investment strategy perspective? Below are a few examples of tech companies who decided to invest in new expensive headquarters, and the stock price today:
*Stock price at close on first day of trading
These data are tertiary market intelligence which are often understandably overlooked despite their usefulness as financial indicators. Despite the proliferation of free accessible data, much of these data are in disparate forms and in multiple locations. The task of collecting and normalizing these data can be prohibitive. One good example of tertiary market intelligence is a study published by Yale Law Journal in which a meaningful correlation was drawn between corporate aircraft movements and future stock price action. These data sets have been available for some twenty years, but this is the first useful application. This perhaps is another example where data could be leveraged as a corporate barometer, and in conjunction with other market indicators could be a useful and profitable measure.