In early 2014, a number of high-profile acquisitions were locked in at prices that many found confusing. The good times are probably coming back.
Those same companies are all incredibly cash-rich.
The result of that combustible milieu is that we could see a new wave of big acquisitions. The logic is pretty simple: When your stock price is high, buy shit with it. The small percentage of your total shares that are actively traded are up, driving your whole valuation north. Why not use that headroom to buy toys or upstart firms that could pose a threat to your cash flows?
Investors are essentially granting you short-run paper value to use as a weapon.
A few examples will help. When Facebook bought WhatsApp in February, its shares were trading for around $68 each. Facebook traded for less than $24 per share in the summer doldrums of 2013. Its impressive run into the New Year saw its stock hit (then) all-time highs between late January and March. Facebook bought WhatsApp on February 19, and Oculus on March 25.
$21 billion in deals in just over a month, near a local maximum of its share price. Surprise.
Facebook’s shares receded as did the stock price of other technology firms as investors temporarily soured on tech stocks. Keep in mind that when Facebook’s share price declined, the cost of its acquisitions declined — when you buy something with stock, and that stock value declines, you bought it at a discount. It’s like buying something with dollars, and then watching the value of those dollars decline, while the thing you bought theoretically appreciates in value. There is a material incentive to pull the trigger on acquisitions when your company is trading at a higher share price.
Tech stocks are back up, the NASDAQ is nearly at 4,500, and IPOs of companies that have shown declining revenue are spiking.
I asked venture capitalist Jason Lemkin if the current market conditions will lead to a strong acquisition field in the short-term. He agrees that it will. Lemkin thinks the cycle could last as long as 24 months. If he’s right, things should stay bright for quite some time.
Brad Sams, CEO of Tracour, a company still in beta that provides analytics on the share price of companies across several industries, also linked the rising share prices to aggressive purchases in a comment to TechCrunch:
With stock markets pushing all time highs across the board, companies want to use this newfound value in their shares as part of negotiating agreements. Even with cash on hand, corporations are making offers of both cash and stock for startups as it’s an easy way to acquire a company without putting a large dent on the corporate cash accounts.
When the large tech companies compete from selling cloud storage to phone hardware to music sales to consumers, every edge is worth buying so that your competition can’t do the same. That drives up prices. Fear is a great tool to push the price of an acquisition — Salesforce didn’t buy RelateIQ for its short-term revenue.
Who gets picked up? Pinterest, Box and Dropbox are obvious thoughts. Keep in mind that a purchase can be at a rich valuation, even if the dollar amount is small — big purchases at big multiples make more noise, but small companies can still exit for sums that defy logic.
Not all big-dollar acquisitions are foolish, though they can lead to pretty big writedowns. Facebook’s Instagram and WhatsApp deals now appear almost prescient, for example.
Adding to the above is the need for all platform companies constantly upping the ante on where they compete. Everyone needs analytics, we recently learned. Who knew! TechCrunch’s Matthew Panzarino summed up that episode:
Apple bought Testflight, Facebook bought Onavo and Twitter bought Crashlytics. If you’re a modern web company that has any interest in mobile, it pays to be deadly serious about analytics. The in-house market intelligence that a widely adopted analytics and crash-reporting package can bring you is beyond gold in the mobile era. These companies know that and they’re willing to earmark a significant chunk of change to ensure that their flow of data remains fresh and influential in their decision making. Whether those are product decisions or related to future M&A.
So there are moments when the companies will run in a pack. But each platform company has unique DNA, making its potential purchase list different. Google wouldn’t buy Beats, Apple wouldn’t pour money into Uber, and Microsoft wouldn’t dump money into Facebook — kidding on that last one.
All told we should see an active second half of 2014. Place your bets on who will get acquired and for how much in the comments.
IMAGE BY BRYCE DURBIN