KUHN CAPITAL Saturday, February 24, 2018
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Facebook Is Worth $15B. Agree/Disagree


So Microsoft’s $240M purchase of 1.6% of Facebook stock puts a value on the business of $15B. That’s 100x revenue for a company that may break-even this year.

The Wall Street Journal quotes Microsoft’s Kevin Johnson as saying "We're pleased with the economics of this deal."

What could those "economics" possibly be, you ask? Well, it’s not the sort of economics M&A types usually think of – quantifiable measures like net present value, ROI, EBITDA multiples, etc.

Rather, it’s got to do with how Microsoft makes money and what it considers threats to that cash machine:

  • First, the giant flywheel of Microsoft's global market dominance continues to throw off cash, even despite the near-universal ennui greeting Vista, its latest operating system. (Most people buy Vista because when you buy a new PC, you don't have a lot of choice.)
  • So today, even after massive stock buy-backs, Microsoft has a war chest of $6 billion. But where to spend it? High-profile acquisitions would attract fresh hells of regulators. In this context, $240M for Facebook is a) peanuts: b) safe from regulatory harassment.
  • Second, as is well-known, Microsoft doesn’t develop new products: it refines and markets other people’s products
  • So if you’re Microsoft, why not peak under the covers to see what you can take from maybe the next big opportunity -- linking online advertising to social networking? One expects that Microsoft’s investment grants it all sorts of insider privileges like participation in, or at least notification of, key Facebook R&D and strategic decisions.
  • Microsoft also gets preferred vendor status as on online advertising rep for Facebook. Another learning opportunity.
  • Finally, Microsoft sees great value in blocking its arch adversary, Google, from the same access as the two engage in an epic battle over desktop eyeballs.

From the deal-maker’s perspective, the transaction is a clear example of how value can sometimes be nearly entirely driven by the right alignment of the strategic stars.

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