Betting The Farm - playing with your investors money
Ok, let’s play a little game here …
The news around the web is that News Corp and Yahoo! apparently have been in some sort of talks about an acquisition. Might happen, might not. But the one thing that does seem to be known is the pricetag of $12 billion.
Ok, first off - kudos to Robert Murdoch if he can pull that off. He’ll have made the stock market equivalent of a real-estate flip, and profited handsomely from the process. But am I the only one, or does this seem like such an insanely large acqusition price, that it could be risky for Yahoo! as a whole?
I always find these analysis interesting, because people quickly start looking at the trees (”Ah! But they have a $1bn agreement with Google!” and “Well, it’s an all-stock transaction, so blah blah blah…”) and ignore the forest completely — the simple fact that Yahoo!’s current US market capitalization is $37bn today, according to their own quotes, which means they are effectively betting one-third of their company on a single acquisition. Perhaps I’m just a naieve idiot who doesn’t understand the more subtle complexities of market economics … but boy this really feels dot-com-bubbleish to me!
Am I wrong for thinking that? Maybe there are plenty of examples of companies that have paid one-quarter, one-third, or perhaps even more on a single acquisition that have done well with it. But perhaps more often than not, it leads to spectacular failure? I don’t know …
So that’s the game - how many examples of successess or failures can we come up with, where one-quarter of the acquiring company’s market cap (or more) was involved. Doesn’t matter if it’s cash, or stock, or cash and stock …
I’ll start the ball rolling. In 2000, PSINet acquired Metamor Worldwide for $2 billion dollars. At the time, their market capitalization in the US was $6 billion. Guess where they ended up? Bankruptcy 12 months later, and they never made it back out (they were sold off in parts). So — that one was a failure.
Got other examples? Leave them in the comments below … I need to figure out if I should start selling Yahoo shares short 