Bidding war with Salesforce drove up Microsoft’s LinkedIn bill(next.ft.com)
next.ft.com
Bidding war with Salesforce drove up Microsoft’s LinkedIn bill
https://next.ft.com/content/c741d6bc-3fdc-11e6-8716-a4a71e8140b0
44 comments
definitely interesting topic. Reading their analysis though, led me to believe they didn't control for enough obvious variables.
Let me go through a scenario to give an example: how much was Nokia worth to Microsoft? Their idea that "due diligence" would uncover a value, and MS should signal the due diligence and the value with the pennies in the offer price doesn't reflect the truth of the situation that nobody knew or could know the value.
I'm not talking about a hindsight analysis after the Microsoft's mobile strategy failed; let's say it had succeeded and Microsoft was now equal to Android and iOS in a vicious 3 way competition: how much of that value would you attribute to the parts that came from Nokia? How much of the value would be due to MS's software? whose marketing muscle was it? Since it would now be a threeway competition, profits would be thinner, how much of that could be predicted with "due diligence"?
You don't know, because nobody knows; these types of intangibles are on the balance sheet as Goodwill because it's not possible to put a value on them except immediately post facto an acquisition. Due diligence is to uncover that what they are selling is what you think you buying, not the value you think you can extract from it in combination with your own assets, that's a secret you keep.
Let me go through a scenario to give an example: how much was Nokia worth to Microsoft? Their idea that "due diligence" would uncover a value, and MS should signal the due diligence and the value with the pennies in the offer price doesn't reflect the truth of the situation that nobody knew or could know the value.
I'm not talking about a hindsight analysis after the Microsoft's mobile strategy failed; let's say it had succeeded and Microsoft was now equal to Android and iOS in a vicious 3 way competition: how much of that value would you attribute to the parts that came from Nokia? How much of the value would be due to MS's software? whose marketing muscle was it? Since it would now be a threeway competition, profits would be thinner, how much of that could be predicted with "due diligence"?
You don't know, because nobody knows; these types of intangibles are on the balance sheet as Goodwill because it's not possible to put a value on them except immediately post facto an acquisition. Due diligence is to uncover that what they are selling is what you think you buying, not the value you think you can extract from it in combination with your own assets, that's a secret you keep.
You're right; there are many unknowns. But that doesn't mean you pull a number out of thin air. M&A teams use all kinds of models to make financial projections and calculate ranges for valuation. Even for the LinkedIn acquisition, other bidders backed away because per their calculations, the deal was getting too pricey.
The rounding thing I think is only a signal. When you get a rounded offer, you feel that the buyer has room to go up. When you get a precise offer, the signal is the buyer has an exact notion of how much this is worth to them, so they might not be willing to go much higher than their initial offer. It's a psychological thing which will probably have a smaller effect in a bidding war.
The rounding thing I think is only a signal. When you get a rounded offer, you feel that the buyer has room to go up. When you get a precise offer, the signal is the buyer has an exact notion of how much this is worth to them, so they might not be willing to go much higher than their initial offer. It's a psychological thing which will probably have a smaller effect in a bidding war.
http://venturebeat.com/2016/07/01/salesforce-lost-the-biddin... has details and filing.
For the non-paywalled version click this [0] link (or the "web" link at the top of this page) then click the top search result.
[0] https://www.google.com/search?q=Bidding%20war%20%5Bwith%20Sa...
[0] https://www.google.com/search?q=Bidding%20war%20%5Bwith%20Sa...
ptibbetts(3)
So, if i understand this correctly, microsoft paid too much for linkedin because they didn't want anyone else to buy it, but now they have to recoup the purchase cost and they'll do that by making cuts at linkedin?
Wat?
Wat?
Well, a key aspect of this, and part of why LinkedIn wanted to sell itself to Microsoft, was that Nadella/Microsoft will allow LinkedIn to operate independently within Microsoft under Jeff Weiner. Microsoft didn't pay "too much," it's just that for the price that they paid, they want to see LinkedIn reduce costs. You have to remember that LinkedIn, despite an earnings report that would make you think otherwise, loses money on a GAAP basis. So Microsoft was fine with paying more as long as they could reduce some of that burn moving forward. That is not an indication that the deal was too expensive in aggregate, it's just how Microsoft thinks about its cash position moving forward.
> for the price that they paid, they want to see LinkedIn reduce costs
I'd expect Microsoft to want LinkedIn to maximize profits.
In that equation, the sunk cost of the acquisition should not be a factor.
I'd expect Microsoft to want LinkedIn to maximize profits.
In that equation, the sunk cost of the acquisition should not be a factor.
I'd expect Microsoft to want LinkedIn to drive users into the MS enterprises ecosystem, not maximise profit on its own.
Well yes, of course, you don't buy something for $30B that you expect to lose money in perpetuity. But in terms of where the business is right now, they want to see LinkedIn reduce costs while continuing to work toward profitability.
When you say "make you think otherwise" do you mean that their report is in the red despite large revenue or that they are fudging the books to make the report appear not in the red? (I'm trying to understand what you meant by not being in profit according to generally accepted principles)
Not the OP- it's not fudging. As a business you get to choose what kind of accounting standards you want to follow. When someone says GAAP basis, it means the closest to a good or universally accepted accounting method (or straightforward means of calculating a profit).
You don't really have a choice. A company has to provide GAAP financial statements. And can also include non-GAAP financial metrics that "give a more accurate view of the operations and financial situation of the company." But they cannot do anything they want, there are rules imposed by the SEC (for example, they have to explain how to reconcile the GAAP and non-GAAP results).
For LinkedIn, from the press release for Q1 results: "GAAP net loss attributable to common stockholders was $46 million and non-GAAP net income was $99 million."
https://investors.linkedin.com/events-and-news/corporate-pre...
For LinkedIn, from the press release for Q1 results: "GAAP net loss attributable to common stockholders was $46 million and non-GAAP net income was $99 million."
https://investors.linkedin.com/events-and-news/corporate-pre...
You have to provide both, but you can focus on non-GAAP. For instance, earlier this year Facebook and Amazon moved to report on a GAAP basis, having previously focused on non-GAAP.
The number that they like to emphasize is their non-GAAP income (which is positive), though they report both non-GAAP and GAAP. Many tech companies report non-GAAP financials - that's not unusual. The thing with LinkedIn is that they have a major reliance on stock-based compensation, one of the highest of any tech company as a percentage of their revenue, and they do not include this compensation in their non-GAAP results (the idea here is that these are one time awards that are not "real" ongoing expenses for the company).
Issuing stock based compensation is fine, but they issue so much of it that it's an integral part of how their employees expect to be paid (so much so, that the stock taking a nose dive at least in part prompted the board to sell the company to get the stock back up). On the other hand, cash salaries certainly are taken into consideration when calculating GAAP and non-GAAP income. So you have important compensation for employees that they could never operate without rewarding, yet they remove it from their promoted non-GAAP number. I find this dishonest. It's not wrong - in fact, it's probably smart of them to do this! - but it results in them reporting a headline number that's just very removed from reality, and that lets them claim "profitability" while really not being profitable.
Issuing stock based compensation is fine, but they issue so much of it that it's an integral part of how their employees expect to be paid (so much so, that the stock taking a nose dive at least in part prompted the board to sell the company to get the stock back up). On the other hand, cash salaries certainly are taken into consideration when calculating GAAP and non-GAAP income. So you have important compensation for employees that they could never operate without rewarding, yet they remove it from their promoted non-GAAP number. I find this dishonest. It's not wrong - in fact, it's probably smart of them to do this! - but it results in them reporting a headline number that's just very removed from reality, and that lets them claim "profitability" while really not being profitable.
Sounds like a page out of Yahoo's playbook.
Ah, remember when dominos came out and was like, "We know we suck, but we're better now, I swear!" And for a minute, dominos got better. But now? Well now it's basically back to the same old shenanigans. Maybe it was just my hopeful imagination that convinced me they got better at all?
Maybe this is how it goes with Microsoft (just like yahoo).
Thinking about it, can anyone cite an example within the last 10 years when a non-founder CEO came in and successfully "turned things around" at a company? I can't.
Maybe this is how it goes with Microsoft (just like yahoo).
Thinking about it, can anyone cite an example within the last 10 years when a non-founder CEO came in and successfully "turned things around" at a company? I can't.
Maybe you're looking far too restrictively and only thinking of tech companies, because of course it happens.
Last 10 years? Alan Mullally at Ford and Richard Anderson at Delta are two off the top of my head.
Last 10 years? Alan Mullally at Ford and Richard Anderson at Delta are two off the top of my head.
T-mobile US comes to mind as an example
This wasn't in the last 10 years, but Louis Gerstner turned around IBM in the 90s and wrote a good book about it:
Who Says Elephants Can't Dance: https://www.amazon.ca/Who-Says-Elephants-Cant-Dance/dp/B00DJ...
Who Says Elephants Can't Dance: https://www.amazon.ca/Who-Says-Elephants-Cant-Dance/dp/B00DJ...
It's a rare situation in the first place with so many founder-led companies these days. I would dare put David Sacks' name in the ring for what he's doing at Zenefits. Yes, his grade is certainly I for Incomplete at this point, and you can absolutely quibble with not just some of the things that he's done but how he's done them (the narrative that he knew nothing about the insurance fraud after having been there for a year as COO certainly makes me roll my eyes), but you have to admit there is very clearly an adult in the room at that company where there had obviously not been one (or at least one that was taken seriously) in many years.
If you want to talk more large cap, you have to admire the job that Meg Whitman has done at HP, particularly now the HPE side. She came into what was really a terrible situation after they finally got rid of Leo Apotheker, who was, frankly, a pathetic leader for them. The company was saddled with unbelievably poor acquisitions, in particular the Autonomy purchase, poorly performing business divisions, and what can only be described as an aging and lethargic workforce. Despite it being really thankless work I would image, the new HPE, especially after the deal to merge most of their low-margin offshore consulting work with CSC, you have to admit is an intriguing company with a positive future ahead of it. She too receives an Incomplete, but what she's done has been impressive to date.
If you want to talk more large cap, you have to admire the job that Meg Whitman has done at HP, particularly now the HPE side. She came into what was really a terrible situation after they finally got rid of Leo Apotheker, who was, frankly, a pathetic leader for them. The company was saddled with unbelievably poor acquisitions, in particular the Autonomy purchase, poorly performing business divisions, and what can only be described as an aging and lethargic workforce. Despite it being really thankless work I would image, the new HPE, especially after the deal to merge most of their low-margin offshore consulting work with CSC, you have to admit is an intriguing company with a positive future ahead of it. She too receives an Incomplete, but what she's done has been impressive to date.
Kaz Hirai is doing pretty well at Sony, all things considered.
Hopefully it won't be as bad for Linkedin employess as it was for Nokia employees.
The TL;DR version is that acquisition offers in round numbers signal that the buyer hasn't done proper due diligence. "Round initial offers were less likely to secure a deal than precise offers. When they did, they ended up costing the bidder more. All other things being equal, an acquisition launched with a bid rounded to the $5 level had, on average, an $18 million larger price tag than an acquisition launched with a more precise bid. The stock market reaction was also 2% less (i.e., the bidder’s stock price jumped on average 2% less) for bidders making round offers than for those making precise offers."