I don't normally comment about deals in my blog most generally because I think (and many studies back me up on this) that M&A as a means to grow is a much dicier proposition than organic growth (which coincidentally is what corporate portfolio management focuses on :) M&A growth is generally predicated on esoteric visions & ambiguous synergies and usually serves to make a company or a management team look bold and visionary. Unfortunately, it tends to fall on its face and take down with it many senior executives. In this process, your friendly neighborhood investment banker does well because he helps put the deal together and then when things sour, he gets to charge you to break it apart to "unlock value". Companies, unfortunately, don't fare as well (except a few solid serial acquirers who are in a very small and exclusive minority).
In this case, we don't have an acquisition but a $240 million investment by Mister Softee in Facebook for a 1.6% stake. This values Facebook at $15 billion. Wow. I think Facebook is a tremendous service/product and has the very real potential to live upto that valuation one day.
My concern with the investment is centered not on Facebook's future prospects but around a few key questions:
- Was deal envy a driver? - Google had been winning many of the recent M&A deals and so it seems from press reports that Microsoft felt the need to do this deal to really put forward that they are serious about being a player in online advertising, social networking, etc (put in any hot growth area here). If vision and bravado were part of the mix (and it'll never be admitted to but they were), we have a problem.
- Is the price rational? - Will they be able to demonstrate an eventual ROI on the business relationship with Facebook? I'm not talking about gains from an eventual Facebook IPO. It is not Microsoft's job or business to diversify on behalf of its shareholder by investing in companies. As a result, we really need to look at whether the value of the ongoing business relationship with Facebook will pay back.
- Is this the solution? - From a search perspective, Microsoft is getting its proverbial a$$ handed to it by Google. More generally, Microsoft has a relevance issue online. By investing in Facebook, do they solve for those issues or do they just distract people from focusing on the issues in their online business? Shock and awe and a desire to move to fast-growing, sexy segments seems to have won out over a substantive overhaul and rethinking of how to innovate.
- What would $240 million have done organically? - Microsoft's cash horde is well documented, but that doesn't mean they want to give out money. Was the alternative of looking at what internal investments this $240 million could have funded examined or was the company so intoxicated and hot to trot on Facebook that they had to do a deal - no matter what.
- What about the culture? I am curious to see how this hot, raging startup will deal with big corporate Microsoft. I hope they've given significant thought to this as it has the potential to derail their entire effort - quickly.
I am sure these questions were asked but in the excitement to do a deal, the projections (aka best guess) and even discussions on the softer stuff ("Yes, we'll put together a task force on culture integration after the deal is done") can definitely push you to the outcome you want. I applaud Facebook for realizing the leverage they had with MSFT and really capitalizing on it. Microsoft is up after hours so that may be an indication that The Street likes the deal. I wouldn't pay any attention to this as The Street is wrong 1/2 the time. Time will tell what happens with this deal. I do hope it works out for both parties. That said, I'm highly cynical/skeptical that it will. I think Microsoft may make a killing on an eventual Facebook IPO but that was not the reason for this deal. And for the strategic and business reasons this deal was done, it's now on the record that I don't see it working. Thoughts anyone?