Reminds me of 4 lessons I read about start-up exits:
Don't swap your stock for another.
Don't deal with anyone with a question mark over their head.
Take the lower valuation with the company you trust more.
Don't celebrate until the cash is in the bank.
All 4 rules were broken here. Seller beware.
Reasons?
When someone swaps a stock - they implicitly value it less than what they get. Hence if you swap your stock with someone else, the buyer implicitly states that your stock is worth more than theirs. Losing deal.
Would you marry someone you didn't trust? No. Then why would you swap your baby for theirs?
Certain return with someone you trust is 10x better than a "certain" return from a flaky agent.
Nullify any agreements that don't put cash in the bank and give you more risk than reward. Take the breaker clause. Or lose everything.
There can be reasons to take part-stock deals. For example part-stock deals also ensure that the acquired are invested in the purchaser. In essence by trading stocks they are buying something more valuable, your loyalty. The question is, how much do you want to give it. If my business were buying your business, I'd go for a part-stock deal just because it keeps your wealth tied in part to my firm's performance. This is what is being purchased that's so valuable: power. But this is usually a good thing for all involved because it ties everyone together financially and prevents the acquired from calling it quits and running off to do something that undercuts the acquirer.
But all-stock deals? That suggests something is horribly amiss.
All-stock deals are usually very fishy because it generally illustrates that the buyer, quite simply, does not value their stock that highly (and values the seller's stock way more - so why are they selling?).
This is not a good sign.
Part-stock deals make some sense - to tie people up (vesting/milestones/lock-up) and align them with your interests. However it really should be a mostly cash deal (say 80-20 or 60-40 cash/stock) if it's public liquid stocks in a great company (but they usually do straight cash deals - e.g. Facebook/Google/Apple).
Trading private illiquid stock for private illiquid stock is a big no-no, unless it's a small amount (10-20%) with a high probability of a near-future liquid exit (IPO/public-cash acquisition).
If a business is unwilling to part with significant operating capital for a purchase, that means either they can't be bothered (yeah, this might be valuable in the long run, why not? but not worth putting hard cash into now) or more likely that they can't afford to, which was pretty obviously the case regarding L&H..... Either way it's bad and shows either a lack of commitment or a financial hardship.
In other words, I don't care too much about how much stock is purchased. I want to see the cash impact of the transaction because that is an important indicator of the health of the purchaser. "You want to go from 20% stock to 80% stock? Fine as long as I get the same amount of cash directly from you either way! You can just give me additional stock if you like..." ;-)
Even if I was just an investor, if I heard a publicly traded firm bought another in an all stock transaction I'd be selling my shares.
> Even if I was just an investor, if I heard a publicly traded firm bought another in an all stock transaction I'd be selling my shares.
Correct. But sometimes you don't get that option as a small company being acquired - so getting public liquid stock in good companies is perfectly fine (so long as the lock-up isn't too tight - and it's a part cash deal).
Berkshire Hathaway used this to great effect when acquiring Gen Re in 1998. As the stock market was racing, Warren Buffett swapped his overvalued Brk.A stock for all of Gen Re in a mostly stock deal. After the 2000 dot-com crash he just bought back Brk.A stock cheap with the large cash holdings he held due to the previously frothy market. Sell high and buy low people.
So if someone is trying to sell you some stock - remember - "You are the sucker!".
Unless of course they are Google. Then you're a genius. You win some - you lose some!
>Correct. But sometimes you don't get that option as a small company being acquired - so getting public liquid stock in good companies is perfectly fine (so long as the lock-up isn't too tight - and it's a part cash deal).
It still tells me that something is amiss. Why not use working capital? What's wrong there? Not enough cash or cash equivalents on hand to do it? Or the company isn't worth committing to by parting with cash?
Either way if I am a stockholder in the purchasing entity, it's a bad deal for me.
All-stock deals are usually very fishy because it generally illustrates that the buyer, quite simply, does not value their stock that highly (and values the seller's stock way more - so why are they selling?).
An all-stock deal is basically a merger. The seller doesn't necessarily value the buyer's stock way more, they might value the combined entity more than they value the sum of the parts. "Synergy" is the buzzword of the day.
For example, the merger of Confinity and X.com (i.e., paypal) was certainly worth more than either of the individual companies.
> When someone swaps a stock - they implicitly value it less than what they get. Hence if you swap your stock with someone else, the buyer implicitly states that your stock is worth more than theirs. Losing deal.
If you're implying that M&A is a zero sum game and that every win for the acquirer is a loss for the seller then no, you're wrong. Your argument really applies to any sale (of anything): for the buyer to buy they have to value the goods more than the price, but the beautiful thing in trade is that the seller can still value the price higher than the goods, without anybody being wrong. Voluntary trade can create value out of thin air.
In an M&A type stock swap deal the reason this works out is that the merger itself can create value. Merge a company with traction in the market with one with a killer product and you have something that's more valuable than the two separate companies.
Obviously these are rules of thumb and do not apply to sophisticated agents that actually know what they are doing.
> In an M&A type stock swap deal the reason this works out is that the merger itself can create value
This is the exception not the rule. If you think you are a) sophisticated and b) in this rare situation - then disregard everything I have said.
> Voluntary trade can create value out of thin air.
If and only if both parties are sophisticated and value the exchanged items correctly. Trade can create value out of thin air. It can also turn value into thin air (booms/busts/fraud etc.).
Capitalism and trade are double edged swords - all I want people to do is watch the downside while they grab the upside.
Reasons?
When someone swaps a stock - they implicitly value it less than what they get. Hence if you swap your stock with someone else, the buyer implicitly states that your stock is worth more than theirs. Losing deal.
Would you marry someone you didn't trust? No. Then why would you swap your baby for theirs?
Certain return with someone you trust is 10x better than a "certain" return from a flaky agent.
Nullify any agreements that don't put cash in the bank and give you more risk than reward. Take the breaker clause. Or lose everything.