Yahoo announced today that it has reached an agreement to acquire Tumblr for $1.1 billion in cash. This post is written with an intention to shed light on why companies merge with or acquire other companies, while using Yahoo’s acquisition of Tumblr as a case study.
Valuation is an art and a science that uses a combination of analytical techniques, methodologies and common sense to determine the fair market value of an opportunity. However, when it comes to valuing pre-revenue startups, it is more of an art than science. Pre-revenue companies have no financial records that can be reasoned. Financial projections are the result of assumptions built on assumptions.
The valuation of a pre-revenue company is guided by a combination of:
Inflation is a tax without legislation- Milton Friedman
The combined effects of income taxes and inflation can bite away a substantial portion of your pre-tax nominal returns from investments. Income from investments can only increase an investor’s wealth to the extent that the nominal returns from exceed inflation rate plus the product of pre-tax return on investment and tax rate.
A nominal return of 10% may seem attractive. However, at a tax rate of 30% and with inflation going strong at 6%, the real return is only 1%. Here is the math for it:
Leveraged buyout (LBO) is a strategy of using financial leverage to acquire controlling interest in a company from its current shareholders. The buyer only invests a small amount of own equity.
There was a time when countries around the world used gold as the primary means of exchange. It all changed post-WWII when in an effort to free up international trade and fund reconstruction, the Bretton Woods System came into being. Under the new system, the US dollar replaced gold as a universally accepted medium of exchange. As a result, the US dollar was deemed the global reserve currency which made sense since the dollar was as stable as gold.
The nations had to fix their currencies against the US dollar. Furthermore, the price of gold was also listed in US dollars, $35 per ounce at that time. This gave countries the option of exchanging their own currencies for US dollars. Due to this system, virtually every currency in the world was backed by gold.
Twitter is an anomaly in the world of social networking. The platform gives you the chance to speak your mind in 140 characters or less. Initially, it was feared that the idea didn’t have potential but boy has it caught on. Today, it seems that the world would come to a halt without Twitter. Looking over the applications of Twitter, one can conclude that it is nothing less than a revolution.
In our society, we need money in various aspects of lives, to fulfill most of our aspirations. Individuals try and save money to serve as a cushion in a number of cases, such as to acquire new assets, to purchase goods, for emergencies, etc. Universally, banks are the preferred medium for holding our savings. This is because:
1) Security: Your money is better safe-guarded by a bank than yourself.
2) Interest: You also earn a stable return for holding your money in the bank.
3) Liquidity: You can withdraw your money at any instance that you desire.
Why Buy When You Can Rent?
Sharing allows us a deeper insight into the human spirit, which is a fact collaborative consumption thrives on. The term is used to describe a prevalent economic model that involves sharing, bartering, trading, renting etc. as opposed to ownership.
This has made access to goods and services way easier than ever before. Online consumers have grown smarter. Now it takes more than a flashy advertising campaign to make them go into a buying frenzy. Why would they, when they have peer reviews, social media and online forums that can give them a much more accurate evaluation?