Acquisition Finance

It's monday and it's time to move on from the MBA Mondays series on Employee Equity. We did nine posts on employee equity and hopefully we moved the needle a bit on understanding that complicated topic.

I'd like to switch topics now and talk about acquisition finance. The other day Chris Dixon said this in a comment here at AVC:

the two biggest tech companies alone (apple and google) are approaching $100B in cash that they will likely use for acquisition to support their incredibly profitable businesses

The point Chris was making with that comment is there is a lot of buying power out there in the big tech companies that can be spent to buy tech startups. And he is right about that. Google has $34bn in cash. Apple has $50bn in cash and short term investments. Microsoft has $44bn in cash and short term investments. eBay and Amazon each have more than $5bn. The numbers add up to a lot of buying power out there.

But just because they have the cash doesn't mean they will use it. There are a number of factors that acquirers consider before pulling the trigger on an acquisition. They look at whether the acquisition will improve or hurt earnings going forward. They look at how they will have to book the acquisition on their balance sheet. They look at how dilutive the acquisition will be to shareholders (even if it is a cash acquisition, they may need to issue employee equity for retention). And most of all, they attempt to determine how the acquisition will be recieved by their shareholders and what impact it will have on their stock price.

I am calling this entire topic acquisition finance. I am not an expert on this topic but I've got a working knowledge of it and I am going to share that working knowledge with all of you over the coming weeks.

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#MBA Mondays

Comments (Archived):

  1. Fernando Gutierrez

    Don’t you think that some of this companies should give part of that cash back to their shareholders? I know that could be read by the markets as lack of ideas, but sitting on a pile of cash (and short term investments) for years doesn’t look like a great idea either. I don’t know about the others, but Microsoft has been doing that for a few years now.

    1. fredwilson

      they should do something with it. if they can’t figure out how to use it to generate an increase in shareholder value, then they should dividend it out. i am not a fan of stock repurchases as i’ve blogged about in the past

      1. Pascal-Emmanuel Gobry

        (Semi-)Interesting side point: in France, a big reason why share buybacks are popular vs dividends is because of tax issues with dividends (they get taxed at a higher rate unless you’ve held the stock for several years). Is there a similar issue in the US?

        1. Dave Pinsen

          Worth reading Mark Cuban’s thoughts on share buybacks versus dividends (he agrees with Fred). A couple of other thoughts re buybacks versus dividends:1) Some old timers who are generally against buybacks acknowledge an exception: when a company’s shares are trading below book value. But that’s relatively rare these days.2) Studies have shown that companies that pay dividends tend to outperform those that don’t over time. One theory as to why this is is that the discipline of having to pay dividends forces managements to be judicious in how they allocate their remaining capital (e.g., with respect to acquisitions).Re taxes, under current law in the U.S., capital gains and dividends are both taxed at 15%. But that’s part of a tax package that’s set to expire this year (although there are talks about extending it). If it’s not extended, taxes would revert back to the previous rates: dividends taxed at ordinary income tax rates (up to 39.6%) and capital gains taxed at 20%. Investors in the U.S. can also hold stocks in tax-sheltered accounts where they don’t pay any capital gains or taxes on dividends, but they pay income taxes when they withdraw the money after they retire.

          1. Pascal-Emmanuel Gobry


    2. Stan Beremski

      Absolutely! Here is an interesting article over on IA that talk about this:http://informationarbitrage…The article highlights that companies such as Google might now want to start paying out dividends because its a signal to the market that they can’t figure out a way to spend the cash to increase profitability. Some investors may take a view that the company should no longer be seen as a growth business and subsequently shouldn’t warrant such high P/E ratio** A high P/E ratio suggests that a company is going to grow in the future. E.G if the P/E ratio is 15x, then an investors is willing to pay $15 for every $1 of current earnings. This offers a return of 7% (assuming all earnings were paid out to investors). Google has a P/E of about 25x which offers a return of 4%. Amazon has a P/E of 70x (!)…or a return of 1.4%.Assuming Google and Amazon are equally risky ventures then an investor might expect Amazon to grow its earnings more rapidly than Google in the future in order to justify the worse returns experienced now.

      1. CJ

        Not that Google couldn’t afford to pay a dividend and do acquisitions but when I look at the market that they play in, I’d rather they kept and deployed their cash for acquisitions. Why? Because things change quickly in the internet game. A couple of years ago Groupon didn’t exist, now it’s rumored to have been acquired by Google for $2.5B. That’s a phenomenal pairing when you consider how much Google knows about everything and how much Groupon is coming to know about local markets worldwide. Not only would this contribute the earnings but it contributes valuable data to Google to target advertising and build out Places and more. And all that for about 7% of cash. You can’t beat that.

        1. Mark Essel

          Thanks Malcolm, I hadn’t caught wind of that acquisition rumor. It’s fun skipping news for a week or two and not missing much.

          1. CJ

            Yeah, it’s been a slow news month or so. LOL Shame I haven’t gotten more done because of it. *sigh* Damn internet induced ADD.

          2. ShanaC

            the news will pick up. besides, I thought that piece about facebook derivatives was big news

      2. wfjackson3

        Don’t forget that Amazon has enormous physical assets.

    3. ShanaC

      problem is that we have a culture of regular dividents- which isn’t always smart. sometimes companies can’t do (something expensive is cooking), or are about to make a huge purchase.

  2. RichardF

    timely post if Google have just used some of that cash to buy Groupon

    1. fredwilson

      groupon is a good fit for google. groupon was the inovator in a new form of online advertising. but it is an ad network at its core. google has scale in that category and should be able to do well with an acquisition of groupon.

      1. Tereza

        They did indeed innovate and Google can provide further reach.But I think the biggest lesson from Groupon is the amount of room for innovation of advertising at the local level that still remains to be had.From the vantage point of the local business, most of whom are service businesses running at low margins, what they bring is disloyal bargain-basement hunters who are crappy tippers and rarely return. Anytime you see a deal that’s to good to be true, know that it is. I’m seeing businesses putting out deals up to 80-90% off. Our Microeconomics prof at Wharton used to joke, “Sure I’m losing money per unit. But I make up for it in volume.It is a dangerous, unsustainable practice.Local small businesses desperately need disruptive ways to drive value TO them, not away from them. Ways that build their brands, not undermine their pricing integrity. I’m building one of those. Google will be smart to by it and/or others like it, otherwise, in the long run, they are biting the hand that feeds them..

        1. andyswan

          Tereza I think you’re wrong here. One of my portfolio companies, does something very similar to groupon (but with a twist that I love, that no one can copy). We’ve seen MOST businesses ask to run another deal right away, because the customers rebook upon using the coupon (if you train the business properly).It’s marketing, not sales. And businesses love getting new feet in the door, even if they have to pay them to walk in.It DOES drive customer acquisition. And there’s one more thing that I’m sure Google realizes that NO ONE is talking about… more thing that makes groupon more valuable than it’s current revs/profits: It’s creating a relationship with a small business in every city, every day.

          1. Dave Pinsen

            What’s the twist?

          2. Dave W Baldwin

            I like that Andy. Yes, you do have to ‘train’ them right….and that is a service that should be expected of the marketing service. Good job.

          3. Tereza

            Andy I’d be interested in learning more as it’s very different from the data I’ve seen. I’ve talked to hundreds of people.I’m looking at — the only ones I see are in Louisville — and the dozen or so deals I see listed are 50% off something or a service that retails for $20, things like IMAX tickets or artisan candles.It’s an easy jump from $10 to $20.My focus is high-end local services in highly affluent communities. The deals they’re complaining about are something that retails for $350 and they snag for $79. Things like premium salon or medispa services (brazilian hair straightening, laser hair removal, restylane or dysport injectables). Those coupon customers are not making the jump from one price point to another.Is the uncopiable barrier the COC relationships?There must be info I’m missing. I’ve no doubt you know what you’re talking about. It’s just so totally different from what I’m seeing and hearing. Would you be up for a private convo?

          4. andyswan

            Sure. I think it’s possible we’re both right.p.s. The salons and spas do very, very well.

          5. Tereza

            pls email me: tnemessanyi at gmail dot com. thanks!

          6. Fernando Gutierrez

            I worked some time for a Yellow Pages company. Back then all people there knew the product was dead but had some hope in the future because they had so many relationships with small businesses everywere. Most of these companies haven’t made a good use of that asset because they haven’t been creative enough with their products (Groupon would have been so easy for them!), usually because their were afraid of compromising the huge revenue (yet declining) from the main product.

          7. andyswan

            Excellent analogy. Thanks for waving the yellow flag!

        2. JLM

          I agree with you from a broad perspective but I am caught on the cost of creating “tryers” and the cost to get a formerly loyal customer to be a repatriated “re-tryer” — the recovery of lost business.The creation of loyal customers is a huge fight and I find that most businesses do not have a real strategy to make them and retain them. They are not artfully segregated and are just lumped into “customers”.Loyal customers will provide passionate burning word of mouth in talking about your business to others, will be willing to pay a modest premium to do business with you, will recommend your business to others, will invest energy in the relationship, will give you another chance when you come up short and will be above average in attendance and average spend.I find that when you really grade your customers — something that it took the casino industry years to perfect — on behavior and value, you only have about 15% “loyal” customers but I think you can create approximately 35% loyal customers.So, I think that a 50% discount to create a tryer, to regain lost business and to reward a loyal customer is a good bet in the long run.

          1. Tereza

            I do agree with what you’re saying. In past days though I’ve been seeing so many that are 60-90% off though! Jeepers! There’s just a huge value gap.The other day I heard an awesome stat. If a woman *doesn’t like* the service she got, she’ll tell 20 people about her bad experience. I’ll try to dig up the quote…but it stopped me in my tracks.So better make sure they’re not giving her the cheapo inexperienced temp because the reputational blowback in your nabe may be more expensive than the investment you made giving them the below-cost service to begin with. If it’s a ‘re-try’, they should try their damnedest to woo her hard and not screw it up.

          2. Fernando Gutierrez

            More on that. In my business some of the most difficult customers we’ve had were bargain hunters.

      2. ShanaC

        but it is such a different form of advertising. How will it fit into the metrics oriented/auction oriented ad structure of google?at least doubleclick sort of works in that regard

  3. Guillermo Ramos

    “But just because they have the cash doesn’t mean they will use it”. I think this is true for the sort term but not for the long.

  4. kagilandam

    Looks like you are expecting a bubble-burst for sure and going to the extent of warning biggies on their investment.

  5. David Semeria

    Fred it all depends on the relative sizes of the buyer and the target.Even if GOOG does actually buy Groupon for $3bn, it will have a negligible impact on their P&L and balance sheet in the short term – and we’re talking about a huge potential deal here.For smaller buyouts, the situation is even less relevant.

  6. William Mougayar

    If you plan on covering this topic, can you touch on the various acquisition structures, pay-out schedules, cash vs. stock, etc. Also, the considerations for staying longer or shorter, and whether they want the people, product or customers.

    1. fredwilson

      Great suggestions. I will attempt to cover all of this

  7. ErikSchwartz

    There’s lots of big expensive stuff to buy. If Apple and Google are serious about IPTV one of them might want to take out Akamai or some of the other CDNs.

    1. fredwilson

      I could see $amzn buying akamai. Good fit with aws

      1. andyswan

        If I were them I’d rather buy UPS.

        1. JLM


      2. ErikSchwartz

        Amazon couldn’t do it for cash, GOOG and AAPL could.Given that Akamai powers ITMS it would really put a kink in Apple’s day if Google owned them.

  8. Pascal-Emmanuel Gobry

    Ooh boy! We’re going to talk about discount rates! 😉

  9. Harry DeMott

    The cash hoard gives all of these companies great power. It’s like a nuclear arsenal. Who knows, maybe Apple want’s to buy Sony, if they ever stumble. And if they want to do that – they are going to need lot of firepower.What would be interesting is if each of these companies really took a flier with the corporate cash – setting up truly outside VC funds – and looking at all of the areas tangential to them and allowing them to grow.Doing Groupon deals is fine – it is very hard to grow a business internally at a large corporation – but Google still has a lot of cash left over even after their spending spree on acquisitions.Microsoft realized it was not a growth company and could never use all of the cash.Thus the dividend.What is really amazing is that for a company like Apple – if you were the CFO, you would think you should be printing stock – as the price is pretty high unless you think they can keep finding larger and larger markets to go after. Then you look at the debt markets and realize you could raise billions at almost no cost. and then you realize that you generate more cash from operations than you know what to do with – thus the stockpile. The biggest issue is putting that sort of cash to work in a way that makes sense for the company. How many CE companies fit well with Apple? How many semi companies does it need? How many software companies of scale make elegant software? They can’t spend enough money on this sort of stuff. So ultimately, the question becomes whether they get into the cell phone service business (including owning spectrum) or the content business (including owning the content creation). How far up and down the food chain do they go?

    1. fredwilson

      i’ve not seen a corporation do venture capital well

    2. Mark Essel

      So not so much the company having VC in house, but taking on the role as an LP with interest in specific investment strategies.

      1. Harry DeMott

        Yes that’s what I meant.I agree completely with Fred’s comment – always too many chefs etc…However, if you could act as an LP – but a very large one – and hand overthe resources of the firm for the GP – then you might have somethingassuming you hired a talented team.

  10. Mark Essel

    This would be a great time for a guest post from a retired buyer somewhere in the series. Does the AVC community have a lady or gent in their network they can tap on? How about you Fred. I’d love to hear this line of thinking fromthe horses mouth, preferably a recently active horse ;).

    1. fredwilson

      i got two emails yesterday from active buyers offering to help

  11. sam schillace

    The financial aspects are interesting, but most people here won’t be big enough to be material to these companies.More interesting to discuss might be how companies look at an acquisition, and what happens to acquired companies and employees. I think there are a lot of misconceptions about what an acquisition is like to go through, and about the likely appetite for lots of small to midsize deals. It’s actually very hard to be manager somewhere like Google and to make multiple deals per year execute successfully.One last thought – I’ve always thought about acquisitions (whether buying or selling) in terms of 5 things: people, tech (IP), revenue, traffic, and market position. A deal has to be really great on one of those, or pretty great on two or (preferably) three, to make sense. This is a good framework to think about what the buyer might get out of a deal.

    1. fredwilson

      like a basketball team

  12. chris dixon

    Great topic. Looking forward to future posts. One thing I would mention is I think most big companies think about acquisitions either from a product of financial perspective. Product acquisitions are usually championed by high ranking product lead and financial metrics are far less important. Usually these are sub $100M. Financial acquisitions are led by M&A group, who are basically just given the mandate: “wall street is pricing us to grow 40%, but we are only growing 20% organically, so I need to acquire things that get our growth % closer to 40.” This is how you explain otherwise head scratcher acquisitions like Intel buying McAfee. In my experience each type of acquisition has a very different process and should therefore be discussed separately. (Although of course in real life these distinctions sometimes get blurred, especially when CEO is product person like Jobs or Bezos).

    1. Guillermo Ramos

      Great comment.Product acquisitions: small, early stage, technically brilliant, covering lack of internal innovation, add value, team integration, teams merge relatively easy,Financial acquisitions: big, expansion stage, market leader, covering lack of organic growth, on average destroys value, teams merge not easy,

    2. fredwilson

      maybe companies should pay more for product acquisitions and not make financial ones

      1. chris dixon

        I agree. Financial acquisitions are an artifact of short-term public market thinking. CEO wants to show growth next few quarters and run a bigger empire. Bankers and sellers all make money on transaction. Market likes it because it shows growth and justifies high P/E (versus, say, dividending cash out which would signal the non-growth stock).This distinction is quite real – I’ve observed it first hand many times from inside bigcos.

        1. Alan Warms

          When you get into discussions with potential acquirer – you need to understand a) what does it mean to be “accretive” to earnings and b) what are operating expense constraints if any. Yes some companies (GOOG) can do these large product buys, but for most other companies at the end of the day the price of acquisition has to fit into a,b. Understanding that is critical to being able to negotiate and advocate a price.looking forward to the posts!

  13. Sebastian Wain

    I am looking forward to an article about how to negotiate big acquisitions like YouTube/Google where the target stocks are not traded publicly. In other words: how negotiation works in big deals.

  14. Andrew S

    Great topic. As the guy who runs acquisitions for a decent-sized public tech company, I am constantly surprised by how many people don’t understand the basic math behind M&A. For instance, many people confuse capex and opex, as in: “why did you spend $50M on that company? With $50M in budget surely you could have built a similar product…”

    1. wg

      could you explain the distinction?

  15. Nikhil Nirmel

    On my plane ride back from Thanksgiving, I sat next to a guy who works at Apple and is very familiar with Apple’s acquisitions process. I asked him how Apple makes acquisition decisions. He said the initial word of eventual acquirees typically comes from the engineers – they hear about an interesting team or technology, Apple talks to them about potentially working together, and then sometimes they’ll try to acquire them. He said that Apple gets pitched a lot by companies that are trying to get acquired and that strategy very rarely ends up in an acquisition. Finally, he said that the tide is turning for Apple – whereas Steve used hold the belief that acquisitions were unnecessary for Apple because they have the best team internally, now they’re realizing that it can make sense to acquire small teams who have a technology built that would save Apple time by not having to develop entirely internally.

    1. fredwilson

      startups rarely get soldthey are almost always bought

  16. Kevink

    Are talent acquisitions handled differently, or is the analysis fundamentally the same?

    1. fredwilson

      very different

      1. Kevink

        If you have time to go over talent acquisition in a later post, I’d definitely be very interested to read it. I hear about talent acquisitions all the time, but it seems a lot less clear cut both how to value such deals as well as how to ensure the talent stays on.

  17. Lgockenbach

    Looking forward to next week

  18. Jeffrey McManus

    I’d be interested to know about whether investors are thinking that macroeconomics (particularly the threat/promise of inflation in the near term) will have an effect on how those piles of cash are managed. Could “quantitative easing” drive the Googles and Microsofts to work harder to put their cash hoards to work?

    1. fredwilson

      there is no consensus that we are in for inflation, although given all the money being printed it sure seems like it will happenmany are worried about the opposite – deflation

  19. HowieG

    This is an interesting topic especially today in this economy. Whether you read any of the major business news publications a big barometer is what happens with these stacks of cash. If the NPV is higher to sit on it, than upgrade with capital investment, adding employees, or buying other companies that is a bad sign. It’s one thing to look at corporate borrowing in a Macro view and say when business start feeling they can repay the funds plus interest it is a positive investment. Spending your cash hoard has even a lower bar to make money. Another side view is often mid-sized to smaller companies with hoards of cash are often take over targets. Things to watch if you play in the stock market.

  20. Gregory Magarshak

    I’m starting to organize a round of funding for my company, so I can raise more money to finish up and launch the technology I’ve been working on for over a year. But since I don’t have much professional experience with raising money, I have a question.It seems to me that the coolest way to structure an investment is like this: come in with an amount of $ that you will need in order to be sure you can take the company to the next level, and then negotiate how much % you are willing to give away. Let’s say it’s $200,000 for 20% of the company. Then take the deal with the investors you think are the best fit, but structure it as follows:The $200,000 is set aside for being used if your company needs it. That way everyone ensures the company won’t fail for lack of money. But you withdraw the money in $10,000 increments. Each time you withdraw, you sign a note and that is when the investors get the corresponding % in your company. If you wind up using $40,000 and launch something that makes your company way more valuable, you can start shopping around for a much bigger valuation. Let’s say by the time you have spent $50,000, you have found investors interested in doing a round at a 10 million dollar valuation. Then your first investors at this point own 5% stake in your company, but that 5% just became 10x more valuable (as did your shares as a founder). Now you do the same thing at the second round of funding, etc.This way, it’s a fair deal for everyone involved and the incentives properly align with what’s good for the company. The entrepreneur will not want to just waste the money they are given, and in fact will actively try to grow the company’s value. This seems like a good deal for the investors, too. In fact, if I was investing $200,000 into a company, this is exactly how I’d want to structure it — I’d start to feel uneasy if the company started spending the last of the $200,000 without another deal in place yet at a much higher valuation. Giving the entrepreneur the incentive to constantly grow the value of the company (and as a result, give away less equity) seems to promote runaway hits, which is what VCs try to fund all the time.Investors in previous rounds would be invited to participate in later rounds. But there won’t be any “back-room deals”: once someone is willing to invest in your company at a 10mil valuation, someone cant go “just give us another 2% at the old valuation”.What do you think? Fred, if you are reading this, could you please give me a piece of your wisdom? I’m just speaking out of intuition here.

    1. Aaron Klein

      Why would investors deposit $200K into an account without getting equity or at least a convertible note for it immediately?

      1. Gregory Magarshak

        Well, investors (and the companies they fund) win when the companies become more valuable than when the investment was made. Because neither the founders nor the investors can accurately predict what will happen in the future, the amount of money that will be needed to sustain the company until becomes more valuable, starts generating money, etc. is not an exact number. It may be $30,000 in the best case, or $200,000 in the worst case.I think it’s in everyone’s interest for the company to become more valuable before it burns through the money that was invested. And thus if I was an investor, I would actually prefer the founders wind up taking less money from me but raising a bigger round, as the money I’ve invested has already generated a return, I am cash flow positive, and my porfolio is that much more profitable. Convertible notes are often treated by VCs as a way to fund a company’s initial growth and be in good position to invest “when the real funding begins”. Well, the scheme I outlined above nets the VC more money than a convertible note.

        1. Aaron Klein

          Unless I’m missing something, I don’t think that works.Investors win when their investment appreciates. If I put $200K in, and I lose the use of that money, I want something in exchange. If you only use $50K of it and I only get $50K of equity, I left $150K in limbo and didn’t make any return for six months, a year, whatever.I also am getting my $50K in equity after you’ve made the company more valuable. Yet you used my money to do it. I should get my equity before you make it valuable so we both get the upside.Don’t get me wrong – if you can find an investor to do this, go for it.I just doubt you will. It doesn’t compute for me.I think you’re overcomplicating it. Think very carefully about how much money you need. Do a simple seed round and raise enough to get you through at least a year. Build a great product. Get some traction with it. Then go show it to VCs if you think that you need rocket fuel to get it to scale.

          1. Gregory Magarshak

            I don’t want to argue but I just wanted to point out something:First of all, until I draw on your money, you are free to keep it in any account that makes a return. Once you transfer it to me, it is the same as if you have invested it in the first place. So you actually generate a return on the money I am not using, something you wouldn’t have been doing if you invested all of it in me right away.Secondly, maybe I didn’t mention this, but after I am able to raise the next round, the money you didn’t invest is free to be used any way you see fit. It is no longer tied up. The only thing you don’t like here is that the remaining money won’t be 10x more valuable now, but then you’re really lamenting not being able to exploit the inefficiency of the system (neither side can predict the exact amount the company will need). In any case, both you and the entrepreneur agreed on the valuation. My point is, I think both the entrepreneur and the investor should be focused on making a more valuable company, not taking advantage of inefficiencies in estimating 🙂

          2. Aaron Klein

            That makes more sense, but I still wouldn’t do it that way.I’ve raised some significant capital before and I don’t see “what’s in it for the investor” to use this approach – other than being able to cut off the entrepreneur when the inevitable rough waters hit.Rough times will come, and I want the time to fix it. I’d take the dilution to get some security. Just plan well so you don’t get too much security. :)In other words, I think you’re worried about the wrong problem. (Just my opinion.)

    2. fredwilson

      that’s how a VC fund workswe “raise” $100mm, and then call it as we find investments that we want to makethe investors, called LPs, are contractually obligated to fund when we call capitalbut in the last crash, plenty of LPs defaulted on those obligationsi would be happy with funding an entrepreneur in this way. but most entrepreneurs don’t want to do it that way

      1. Gregory Magarshak

        Thanks, that helps a lot — good to know that this is a proven model. And yeah, I plan to propose this to my investors as I think it’s a really good deal for both sides — and helps align everyone’s interests in making the company more valuable, rather than subconsciously trying to get a bigger piece of the pie from the other guy, before it comes out of the oven. I’ll let you know how it goes with my investors.PS: I’ve heard a lot about Union Square ventures. I want to approach you guys and show you what I’ve been working on, but I admit I don’t know much about how VCs like to meet entrepreneurs and companies. What is the best way to set up a meeting just to show you what I’m working on? I am not in dire need of investment, but I’ve built the core technology and I’m looking around for the best ways to step on the accelerator.(At the risk of sounding presumptuous, here is my contact info: … in case you want to talk more about it but not on a public forum.)

        1. fredwilson

          send me an email and reference this convo in the AVC comments

  21. John Prendergast

    Fred, I think this is a great topic area. One area I’d like to see explored in the series is the problem of boards and management teams betting on a single acquirer, particular acquisition rationale or specific acquisition timing.I’ve seen a lot of teams disappointed as a result of betting on a specific acquisition catalyst without a strategy to create multiple options. (The most important of which is building a strong stand alone business.)As someone who has spent a fair bit of my career doing M&A, I can tell you buyers do things for their own reasons, most of which are unpredictable.

  22. ShanaC

    Can we discuss why companies choose certain companies amid a bunch of competing and similar products?

  23. Richard Kain

    The numbers are still immense but a lot of this buying power is trapped overseas (Google has 50% of their cash overseas according to Bloomberg (… Microsoft is at least that much surely since they’re hitting the debt market.) and probably unable to be repatriated without additional quite substantial tax liability. I think that accounts for a good part of the lethargy to put it to use — waiting for a tax holiday to bring it back.Or does that make it a great time to invest in Irish startups?

  24. Acquisition Finance

    Will this also mean a one time bonus like Microsoft did a few years ago?

  25. jpwoodland

    McKinsey has some good research on successful M&A deals and what does and does not drive value for acquirers. Among other things they attempt to debunk myths that deals rationalized by improving earnings actually add shareholder value. Here’s a link to what they say are the top five types of successful deals: I also recommend their Corporate Finance book

    1. fredwilson

      that’s sort of what chris dixon is hinting at in his comment in this thread

  26. Woody

    One point to offer here is that most of the cash hoard by these big companies are held in off-shore accounts in their subs. Chambers of Cisco has been promoting an idea to allow this cash to be brought back into the US via a tax holiday:

  27. baba12

    “They look at whether the acquisition will improve or hurt earnings going forward. They look at how they will have to book the acquisition on their balance sheet. They look at how dilutive the acquisition will be to shareholders (even if it is a cash acquisition, they may need to issue employee equity for retention). And most of all, they attempt to determine how the acquisition will be recieved by their shareholders and what impact it will have on their stock price”.The above statement is accurate in terms of how the company acquiring others does some due diligence.But a lot of the M&A conducted by companies is carried out by the bankers who bring the deal together.The boards are required to l see if the deal makes sense from all the things you state as necessary before they pull the trigger, yet time and time again you can see that many deals have failed miserably but the bankers have walked away with no dent to their bottom line.I find that most company boards are spineless, gutless and lack in the basic fiduciary responsibility to the shareholder.Besides all the factors that you mention that are looked at before an acquisition there are important and valuable details that many times they overlook and that is the culture of the company being acquired, and is the acquisition primarily to shut down a competitor.Question I have for Mr.Wilson is when USV is looking to make an investment, do you go through your checklist with one of the criteria being is this a potential acquisition and is it weighted heavily or lightly.In the last 7-10 years most of the VC’s have used their connections to spineless gutless boards to get them to acquire portfolio companies wherein without those connections deals would never have happened, thereby negating all the due diligence factors you mention…Does greed a bigger role than it is ever give credit for?

  28. paramendra

    I kid you not. Ever since I read that Chris Dixon comment I have meant to write a blog post around it. You beat me to it.

  29. Jerome Camblain

    Yes, but mostly Stock buy-back programs tell the market that the managemet has no vision/strategy of growth (internal or external), of where to invest to find this growth.

  30. fredwilson

    in theory share buybacks drive up the stock pricebut in practice it doesn’t often work that way

  31. Tereza

    If you’re selling a perishable product, that’s effective. You’ve paid for the inventory and some revenue is better than no revenue.But if you are a service business, I would take heed. Traffic from customers is addictive. But your sustainable business relies on quality relationships, which of strong should withstand higher prices. Also you need to keep an eye on what will keep your employees fed + happy — because in services they deliver your brand to your customers. Think salons, spas, restaurants.Thing is, when they are forced to deliver super-cheap services — and remember, these people rely HEAVILY on tips — consumers generally don’t know they’re supposed to tip on the retail, not the discounted value. At 50-90% off, this is a big hit for them and they feel like collateral damage.

  32. Tereza

    “Repeat” is an erroneous assumption. They don’t come back. They’re looking for the next deal.

  33. Fernando Gutierrez

    Totally agree. One of my activities is a local services business. The lion share of our profits comes from clients who repeat. And those usually are not driven by price in the first purchase but by service. You should not target bargain hunters unless you have designed your costs to get a profit with them.BTW, I also had a professor who told us that joke about margin and volume!

  34. Dave W Baldwin

    You just need to be ready as we move forward 4-6 yrs. The marketing paradigm then and forward will enable the melding of loyal/return/bargain customers.

  35. Dave Pinsen

    The Last Psychiatrist blogged about a potentially profitable inner city investment recently:And there’s plenty of money to be made for the entrepreneurial. If you want to be rich in inner city psychiatry (and you don’t have to be a doc), you open a clinic and hire 1 psychiatrist and lots of (talk) therapists, usually social workers. Medicaid will pay for 1 therapy visit per week (around $60/hr) and a 15 minute med check with the doc ($40/visit). The doc usually gets salaried but proportionally takes 50% of that. Let him have it all. The therapist, however, gets very little– $20/hr. The rest goes to the clinic. If the clinic serves 100 patients, the clinic can bill $24000 a month in therapy, pay $8000 to the therapists and pocket $16k a month, minus overhead and security guards. Do you know how many patients go to clinics? Thousands. Do the math.I don’t see Microsoft getting into that line of business though.

  36. ShanaC

    I know of at least one company in NY that is getting some help from Redmont. They do take selective interest

  37. PhilipSugar

    I’m going to say I don’t think that is so bad.If I was a MSFT stock-holder if they just milked Windows and Office for all they were worth I think they could have distributed me more than their stock price versus flushing billions on game consoles, and other initiatives.What is wrong saying I’m going to optimize this particular business and shareholders can decide for themselves what other businesses growth or otherwise they want to invest in. I think a ton of money gets wasted by executives blowing money on initiatives so they can keep their job. This is not looking after shareholders.The buyback issue is a bit tough as I know some people argue that it rewards the shareholders that sell. However tax issues complicate that matter. Eventually though you have to pay dividends because that is the cash flows that all companies are eventually valued for (discounted cash flow). Dividends should be deductible just like interest to corporations, but alas that is a pipe dream.

  38. Dave W Baldwin

    Exact on the seperation of return customer vs. bargain hunter.The way I learned the margin/volume was in High School using gas wars between two small town stations.

  39. Tereza

    Then the small business has to get much more skilled at tiering their service levels and operating differently against those price points.That’s easier said than done.

  40. Tereza

    It kinda happens when they book you with the junior stylist or trainee, who’s cheaper than the master stylist.Problem is it’s a crap shoot for the customer. May get good service, may not!

  41. Tereza

    Yes some will come back.It’s so important that they stop periodically and analyze. When a rush comes the adrenaline flows and they focus on pummeling through the volume. It’s a real high when your place is full. Addictive, really.

  42. Dave Pinsen

    That’s interesting: around these parts, the poor generally don’t shop at Costco. They shop at C-Town along with some of the regular supermarkets. Your business idea is to put low cost grocery stores in inner city neighborhoods? Walmart would seem a better positioned to do that than Microsoft, and, if memory serves, Walmart has tried, but has faced some resistance from local governments.

  43. ShanaC

    Wow. I lived in a food desert area for a short period of time. I don’t realize that there is serious money to be made in those conditions

  44. ShanaC

    honestly, considering all the hacks around the Kinect -it might have been a good thing in the medium term to build it. They can start thinking about os as movement!

  45. ShanaC

    Yes, this happened on the southside of Chicago- the reason being is the jobs pay poorly and there are some locally owned businesses that they were afraid of displacement. Plus unions are big there

  46. ShanaC

    I know of at least one business which was really launched it’s product using groupon. It’s good to test market costs and what type of people are willing to try said service (it was a cleaning service, fyi)

  47. Dave Pinsen

    Those sound like weak objections:1) Walmart pays more than minimum wage.2) Even minimum wage jobs are often an important first rung on the economic ladder for people.3) In low-margin businesses such as supermarkets, there is an obvious trade-off between wages and prices: higher wages require higher prices.

  48. ShanaC

    I’m not saying they weren’t, but it did hold off the first walmart fromcoming to Chicago for quite a number of years…Yup, it was an interesting story because there aren’t so many supermarketson the south side.

  49. Dave W Baldwin

    What Shana is pointing out is really the problem in many towns regarding WalMart….the old money operations become scared they will truly have to compete, no more, no less.It was wild how that mentality was at word in Chicago…I was blown away.

  50. PhilipSugar

    You might be right time will tell. But Information Week says MSFT lost at least $7B so far on Xbox. That’s a dollar per share.

  51. Dave W Baldwin

    Sorry for delay… remember those same issues were there before the mobile platforms.So the small business owner has to keep these things in mind when gaining a new customer. If he/she is promoting image over just a quick buck, they will be going for the amenities offered when using their service.Mobile or not, if he/she were to find if the potential customer is after bargain over a better product/service they can act accordingly. The mobile unit will be suggesting other avenues if the whole issue for the customer is $$$. The smarter BO will learn that image and reputation is better in the long run over worrying about Sally who wants the cheapist hair/nail fix.At present, shops all over are starting to show their wares via FB and Twit…as the pipeline expands through rural regions, this will continue to grow. Smart shopkeepers will look for what works. As the speed and reach of the mobile expands, they will be getting smarter and opportunities for those in marketing expand also.