A Meaningful Life

Facebook may not have worked it out yet but they are getting played with. 1-2% is nothing, it’s not a takeover, it’s a cheap option to play the game, with a lot more power as an investor.

The oldest trick in the M&A world is to “get a chunk”. Taking a bite gives you so many benefits that the first and smallest investment is often the best. It can be the buyers most profitable in the event they lose and sell to the winning bidder in defeat. Else, it can be the cheapest equity the buyer will have bought in the company.

I was pretty surprised by the amount of blogging out there talking like it’s a done deal. Sure it might happen one day but this isn’t the normal way you would see it play out so far in a pure, fast takeover. The deal in M&A is never the deal the public see’s. It’s more complex, it’s modelled payoffs. Such as the free press component valuation for the aggressor or better still the brand wash value which is very high on this deal.

What does this deal do?

• Buys probably the equivalent of 10’s or possibly close to 100 million dollars worth of PR. Online, paper and TV. Screen real estate for 3 months as people speculate. So their Facebook spend isn’t 260mio already it’s a lot less.
• Wash Facebook brand onto Microsoft’s brand.
• Makes it easier for Microsoft to buy a blocking stake later. They already have a start now.
• Buys Microsoft time and holds other players out. Other suitors will have their shoulder devil telling them this might be too hard. It’s Microsoft after all, a no debt cash rich company.
• It keeps Facebooks management thinking Microsoft loves them. Microsoft might not love them they just want their new date to think that so they don’t sleep with anyone else.
• Opens compulsory dialogue between the companies. Microsoft is now an investor.
• Equity blood brothers never slag each other and will tend to cross promote better. What would you pay Facebook to be a channel partner for your software company if you have one?
• Microsoft undoubtedly starts to get some influence in Facebook product direction or at least learns what the next steps are.
• Facebook will look to impress it’s big daddy by considering everything Microsoft asks for. Microsoft have a big fat chequebook, wouldn’t you get on your knees? Plus you would never bite that big Microsoft mitt of a hand, it might just feed you a lot of green.

And the best M&A trick of all is…

Microsoft pays up for the first chunk, then the seller/victim re-benchmarks price in their mind and any suitors that come along look cheap and nasty. As a result new suitors say no to Facebooks attempts to get some price tension. The new suitors don’t even try. Then all of a sudden Facebook is left with their initial investor who has only bought a small percentage. Time passes, more time passes and Facebooks business model of low cash and high cost is starting to show particularly as the US economic slowdown hits. What do you know Microsoft does not want to pay the same price any more.

Microsoft still could be aggressive

My guess is they won’t. 15Bio is a big number and if they do get aggressive it’s out of desperation. Let’s not forget it Microsoft can take just about any player out of the market a lot earlier than this, but they didn’t. What does that mean for this deal? Are they that late and stupid? I doubt it.

This entry was posted on Friday, October 26th, 2007 at 8:07 am and is filed under Technology, Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.