You could talk about brand value, customer value, or investment value. Whatever the particular angle, the more general question of what a company is worth is complicated.

The problem is that various attempts to measure value are flawed. Yahoo is a prime example of this. Take the reported bids for the company. Verizon has supposedly offered $3.5 billion. Others, including AT&T, TPG Capital, a consortium with Bain Capital and Vista Equity Partners Management, and a combination of Quicken Loans and Berkshire Hathaway, are bidding at least $5 billion.

On the surface that seems ridiculously little for Yahoo. Last year, the company brought in just under $5 billion in revenue, so all the bidders seem in the ballpark of offering at most one year's revenue, which means they completely discount intellectual property, customer relationships, and other aspects that might boost the price. By some measures, Yahoo's value should be far higher. Its market cap is about $35.6 billion, so, in theory, if you wanted to acquire the all the shares and own the company, you'd pay at least that. Often, acquiring companies have to provide a premium above market price to get what they want.

If you prefer enterprise value, which adds to the market cap the other interests like preferred shares and debt and subtracts cash and cash equivalents, Yahoo is worth about $30 billion. Then again, as someone noted online, Wall Street effectively says that Yahoo has nothing of value outside of its investment in Alibaba and Yahoo Japan because the stock is priced only to take those investments into account. Literally, nothing, which is as crazy as anything else when the company still has $5 billion a year in revenue, relationships with many advertisers, and one of the biggest total online audiences.

Why do all these valuations contrast so strongly? Because our notions of what companies, lines of business, and products might be worth are seriously out of whack.

It might be tempting to go with the old adage that value is determined by what someone is willing to pay. But even that should be suspicious. If companies can drive down the market value of labor, for example, does it mean that the work of the employees is now worth only what the companies are willing to pay? Of course not. They companies gain value from lower wages. What happens is that the part of the value that the employees used to get for their time has been transferred to the company.

Similarly, what's the value of clean air? Before the Clean Air Act, companies didn't see much value. They value they wanted was the ability to dump emissions without regard to air quality. Clean air became, in their minds, a pure cost. But if you're killing people off and making them gravely ill with air pollution, you're ultimately destroying the economy (as well as all the people). There's an enormous value, except it's not visible if you're not looking, as corporate executives did not. Gauging value strictly by market price is like saying that a tree falling in the woods only makes a sound if someone hears it. But a lack of attention doesn't mean there is no value. Chances are there is value to someone somewhere.

But sometimes value has been largely a sold perception. For all the strutting that many companies, particularly those in the tech sector, have done, many of the startups have nothing to show in a traditional business sense, lacking significant income, let alone profits. They may not be able to explain why anyone outside of Silicon Valley would care about what they do. That was Yahoo's problem. It had lots of users, but not enough who really cared about the company. And if the users don't care all that much, the advertisers won't. What the Yahoo bidding shows is the sudden deflation of hype when checks are to be written. It's a lesson to learn because any business can suddenly find itself looking for solid footing when the wishful thinking runs out.

Published on: Jun 10, 2016
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