I've got a deal for you

How do we value businesses?

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The normal parameters are book value + rate of growth in expected future earnings + Market price of fixed assets/investments owned by the company not directly used by the business (net of liabilities) + other assets like Goodwill, brand value etc. In that context, it will be very difficult to arrive at a valuation for Facebook. It has no significant cash earnings, still burning cash in millions, no net fixed assets, but has enormous brand recall and could be of great strategic potential to a Google or Microsoft.

So what’s left? Price offered by the first few bidders? At this moment, it looks like exactly two, or maybe four, parties have determined that number, and they're all in business together -- the Facebook board; Microsoft, which says that its $240 million investment got it 1.6 percent of the company; and reportedly two unnamed hedge funds that each put in about the same amount as Microsoft for the same percentage. It's the financial equivalent of Humpty Dumpty's take on language: "When I use a word, it means just what I choose it to mean, neither more nor less."

Nick Carr calls BS, and rightly so. "First, the investment is part of a broader deal, the details of which are unknown," he writes. "Clearly, Facebook needs cash to support its growth, and the cash payment was a price Microsoft had to pay to nail down the partnership. It has to be seen in that light, not as a market-cap marker. Second, and more important, Microsoft's investment is not financial but strategic. The company is currently engaged in a multi-front competitive battle under conditions of great uncertainty. Facebook forms one of the fronts, and partnering with the company is far more about gaining future strategic options and blocking the advance of a competitor (Google) than about making a financial gain through the appreciation of Facebook stock."

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That gives it a universal appeal. Hey, I’ve got a deal for you. I need one person to send me $10 in exchange for a 0.000001 percent interest in Sequel Ventures, my sole proprietorship business, a closely held consulting outfit that helps businesses needing PE / VC / Debt funding and helping brokerages secure wealthy Foreign Investor client relationships. Voila -- we are partners in a $1 billion company….

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Buyout Fallout

Business Standard ran an Op-Ed - taking stock of the impact of global acquisitions made by Indian companies recently.

It goes that many of these big ticket acquisitions fail because they are peppered with large doses of high cost debt that affects the financial health of the combined entity adversely for years to come. It also suggests the benefits – faster go to market, instant expansion of market share, new geographical presence etc.

There is one more problem. Cross border acquisitions don’t increase market size. It’s an existing market that’s being serviced by a different owner. Coming from a different culture, the buyer runs the risk of cultural mismatch that fuels widespread distrust. Then there’s also the ethnic sensibilities resulting in dilution of a brand. Whyte & Mackay, the Scotch whisky brand when bought out by India’s UB group, is no longer owned by a Scotsman. The competitors immediately go to town with this noise and it takes enormous efforts to convince people of status quo in brew and taste. Eventually when the high cost of acquisition is sought to be serviced by incremental prices, the misery is attributed to the change at the top or worse, the ethnic gap.

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