ATLANTA, GA - Anyone who has followed this blog knows that I am a huge fan of Warren Buffett. The clarity of thought. The common sensibility. The ability to see both the big and the small picture. He's the man, and everyone knows it.
It follows, then, that I'd be a fan of Roger Lowenstein, who wrote the ultimate book on Mr. Buffett, Buffett: The Making of an American Capitalist. My copy is dogeared and highlighted and post-it noted to death. Like Mr. Buffett, Mr. Lowenstein is an excellent student of value investing -- and he shares with Mr. Buffett a clear-headed way of sizing up mergers and acquisitions so that anyone can understand them. Even me.
Microsoft + Yahoo ≠ Google
So without further ado, here are a few choice nuggets from Mr. Lowenstein's article entitled Microsoft + Yahoo ≠ Google in the April 2008 issue of Smart Money magazine:
Assuming that [the deal gets past the antitrust regulators], it does not need emphasizing that $45 billion is a lot of money. It is a sixth of Microsoft's market value, and it is 68 times what Yahoo earned in the most recent four quarters.
If Microsoft is buying Yahoo's earnings, it is overpaying for them. If, on the other hand, Microsoft is buying the latent potential of the 14,300 web engineers and others who work for Yahoo, the takeover price is enough to hire an equal number of even more talented people, pay them $200,000 for each of the next 15 years, and have a few billion left over to seed their retirement and pay for a fancy health club and other perks that the twentysomethings in Silicon Valley seem to require.
In other words, if a rich company like Microsoft wanted to recreate the assets, the potential, and even the brand of a Yahoo -- it could do so for a lot less than $45 billion.
As usual, I appreciate Mr. Lowenstein's perspective -- but from a staffing standpoint, I'm not so sure that Microsoft has the option of actually hiring 14,300 "even more talented" people and paying them $200K, etc.
I mean, seriously. I'm a recruiter. Do you have any idea how hard it would be to just "conjure" up a company, as Mr. Lowenstein suggests? The sourcing, interviewing, testing, relocation, and on-boarding logistics would be nearly impossible -- not to mention outrageously expensive. I can envision the run-up in salaries as the new company tried to acquire wave after wave of the internet industry's best and brightest people. Not gonna happen.
Which means that Mr. Lowenstein's comparison is an academic one. IE, bullshit. And Mr. Lowenstein knows it, which is why he goes on to say that "The only alternative rationale for the merger is that Microsoft is betting on that often-difficult to realize ideal: synergy."
Mr. Lowenstein is being kind when he says that synergy is "often-difficult to realize" in M&A. Back in the 1990's, I read a book called The Synergy Trap by Mark Sirower of Columbia Business School. Without being overly dry here, Dr. Sirower studied the impact of M&A activity on the stock prices of publicly traded companies and found the "synergy premium" to be a total waste of the acquiring company's cash. With very few exceptions. And there was lots of evidence to substantiate his claim.
Bottom line: If I'm Eric Schmidt of Google, I'm hoping and praying that the deal goes through. If you thought Microsoft was a monopoly five years ago, wait until you see Google five years from now.
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