Size ≠ Value.

Size ≠ Value.

I often speak with acquirers that think they are getting a great deal on a target company when really they are giving struggling business owners a way out. Often these buyers equate value to revenue or “adjusted EBITDA” rather than looking at the full picture of a business’s value.

Last week, two Spain Banking giants proved that size does not equal value.  Banco Santander SA announced it would acquire Banco Popular Espanol SA for 1 euro.

As Spain’s fourth largest lender, Banco Popular Espanol (OTCPK:BPESY) saw a €137 million loss in the most recent quarter of 2017. Santander will need to raise around €7 billion ($7.88 billion) in fresh capital to steady the group’s combined balance sheets.

While the size of these companies are much (much, much, much) larger than the businesses I work with, this situation is all too familiar. Unfortunately, the buyers I work with don’t realize they are trying to acquire a dying giant until someone (like me) tells them!

My advice to buyers is to understand the market and remember that size does not equal value. If a target needs the buyer to pay significant past due debts, provide significant working capital, and/or turn around declining sales; buyers should consider that they might be saving the seller from a mess.

How much should you pay to clean up someone else’s mess? Santander is paying 1 euro! 


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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Using M&A To Build A New Product.

Using M&A To Build A New Product.

Many view mergers & acquisitions as a strategy intended to expands companies existing footprint/product lines, diversify, or realize costs synergies. M&A is less frequently viewed as  a method to build entirely new products.

Google’s new Pixel smartphone is an excellent example of a company using M&A to develop a new product. In a mid-October blog post, PitchBook.com highlights “8 strategic acquisitions behind Google’s Pixel“.

Starting in February 2015 Google (Alphabet) made at least 8 strategic acquisitions/investments in companies with smartphone-related technology. 

The acquisitions include NimbuzCloud a provider of cloud-based storage for consumer photos and videos, Skillman & Hackett a company that developed virtual reality painting studio and other art applications, Lumedyne Technologies which designs and develops sensors used in consumer electronics, Speaktoit (also known as Api.ai) which developed a platform offering natural language interactions for devices, and more.

While initially, it may have been hard to understand how some of these acquisitions helped Google’s existing business, the acquisitions now make a lot of sense knowing Google was developing its own smart device.

The resources Google acquired in these acquisitions likely cost less than in-house development. These acquisitions were also all made in the last 2 years thus accelerating Google’s development of its own smart device.

If you are developing a new product, have you ever thought of acquisitions that could get you there faster for less capital? Did you make an acquisition? What were the results?

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

Spitting Watermelon Seeds.

Spitting Watermelon Seeds - Entrepreneur

The other day I saw a post on LinkedIn by Ryan Holmes titled: “3 Worst Entrepreneurial Habits Revealed (by a watermelon)“.

Holmes tells the story of a friend who spent time living in a Canadian village accessible only by plane. Because of the distance, food prices in the village were very high. One day a watermelon arrived in town and the shopkeep placed a $85 price tag on it.

$85 was a lot of money for the people in the village. The community members came up with a solution; cut up the watermelon and sell it in individual pieces so everyone could have some and share the cost. While the community members’ solution seemed logical, the store owner refused to cut up the watermelon. Eventually, “the rare and precious fruit was left to rot on the shelf, unbought and uneaten“.

Holmes say this story shows “three of the worst entrepreneurial bad habits converge: inertia, ego and fear“. He then goes on to detail each bad habit. It’s a great post and I suggest any entrepreneur give it a read.

You can find Ryan’s post on LinkedIn HERE

In the comment section, a LinkedIn user asked; “why no one decided to buy the watermelons themselves and sell them in parts.

This user’s comment highlights the most valuable lesson from this story – good ideas are a dime a dozen but the ability to execute is rare.

The town’s people all thought the shop owner should cut up the watermelon and sell it in pieces but no one wanted to take the risk and/or put in the effort to do it themselves. No one executed!

Some might be surprised at how often I speak with different management teams with nearly identical business plans. While some succeed, others don’t and failure is usually not because of a lack of good ideas. I’m also guilty of thinking of “great ideas” only to never do anything about them and later see an article in TechCrunch or VentureBeat about someone who is executing on my idea. Success or failure isn’t a result of the quality of an idea, it is a result of the quality of execution!

So, if all you have is a great idea and no execution, you are just spitting seeds…


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Damn Spotify, Back At It Again With The Convertible Debt!

Spotify just raised $1 billion with convertible debt after announcing  $500MM in convertible debt a few months ago. In reaction, TechCrunch posted an article titled “Spotify raises $1 billion in debt with devilish terms to fight Apple Music“. While the writers at TechCrunch may think the terms of the convertible debt  are “devilish”, this financing seems more angelic to me.

Key Terms Are As Follows:

–  $1 billion in convertible debt from “TPG, Dragoneer, and clients of Goldman Sachs

– 20% discount to IPO price

If no IPO within the next year, discount goes up 2.5% every extra six months

– 5% annual interest on the debt

Plus 1% more every six months up to a total of 10%

– Note holders subject to 90-day lockup after the IPO (90 days less than 180-day lockup period for Spotify’s employees and other investors)

While this deal has the potential to hurt early investors (including employees and other shareholders), it is only a problem if Spotify (and thus the IPO) doesn’t perform well. In my opinion, that is the only real negative of this deal.

As I’ve discussed in previous posts, its hard out there for unicorns (especially those, like Pebble, competing with well-funded tech giants). So why is this a good deal?

Why This Is A Good Deal For Spotify:

Comparatively, Terms Are Decent: While the terms may appear rich to some, they are not so bad considering the ratchets, liquidation preferences, and other anti-dilution type covenants rampant among late stage unicorn financings. Additionally, more traditional financing consist of locked in valuations providing substantial upside in addition to downside protections.

VCs Are Nervous: Traditional VCs have become cautious of unicorns as exit options are limited (slow IPO market), firms write down the value of their unicorn holdings, and unicorns begin to fail or suffer down rounds.

Competition Is Fierce: Competition has drastically increased and, like Pepple, Spotify is now competing with Apple and other well-funded players.

Valuation Determined In Future: In a difficult environment for unicorn financing, Spotify can maintain its valuation while raising significant capital all priced in the future when the company and or markets are (hopefully) in better condition.

 

Bottom Line:

If Spotify plans on performing well, this deal isn’t “devilish”! But, if Spotify plans on struggling to grow and compete then this deal will be bad for Spotify but, at that point, they will have bigger problems than convertible debt.

I should also point out that, “while there were reports in January they were looking to raise $500 million via convertible debt it’s not clear whether that amount was raised, or the $1 billion we are seeing today is the result of those attempts“. At the time, the terms on the $500MM (leaked by a Swedish newspaper) outlined a 17.5% discount and 4.5% annual interest compared to 20% and 5% respectively for this $1 billion round.  

What do you think? Is this a good deal for Spotify? Does Spotify have any other options? Will Spotify win the music streaming wars?


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Unicorn Shareholders Ready To Leave Fantasy Land.

Unicorn Shareholders Ready To Leave Fantasy Land.

In a previous post, “For Unicorns, It’s a Long Road Out of Silicon Valley.“, I discussed the issues with unicorn exits. Now, it seems like the dreamers of Silicon Valley are beginning to wake up.

A recent article on TechCrunch titled “Secondary Shops Flooded With Unicorn Sellers“, shows concern is growing in the heart of unicorn land. VC’s, employees, and even founders are all looking to exit their unicorn holdings. One of the article’s sources added “The smartest inside money is trying to get out for the first time in six years”.

Struggling IPO markets (January saw not one IPO and recent unicorn IPOs have had poor results) , ratcheted valuations, unicorn failures, and large firms devaluing their unicorn holdings , have those holding unicorn shares worried about becoming “bag holders”.

So far, secondary trades continue to go through. While the “premium” unicorns are still receiving strong valuations, other unicorn sellers are having to take lower prices. Time will tell if this is the extinction of unicorns or just a market correction.


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

En Route To IPO: Spotify Raised $500MM With Notes Convertible At A 17.5% Discount To Market.

En Route To IPO: Spotify Raised $500MM With Notes Convertible At A 17.5% Discount To Market.

Spotify (the Swedish music streaming unicorn) just raised $500 million through convertible notes that “would turn into discounted shares in the company were it to go public“. Those in the micro-cap space are very familiar with notes that convert into stock at a discount and many think these types of notes are exclusive to the micro-cap space. Spotify is just another example of the prevalence of discounted convertible notes in many areas of corporate finance.

The sated conversion price is a 17.5% discount to market. Whats interesting is that, the 17.5% conversion discount is only applicable if the company goes public within one year of issuance. For every six months (after the first year) Spotify waits to IPO, 2.5% in additional discount is added to the initial 17.5% discount.  

It seems like Spotify is using this offering to raise capital more like a public company and less like a private company. Perhaps the company anticipates a strong IPO and/or strong growth in the coming months and has decided to leverage this optimistic view of the future with this “future priced” offering.

Spotify has not set an official IPO date. The slow down in IPOs (January 2016 saw not one IPO) and trouble with unicorn IPOs, as a large number of potentially overvalued unicorns rush for the door, has me a bit surprised Spotify opted to tap this type of financing. A Swedish newspaper reports that Spotify is eyeing joint listing in Stockholm and the U.S. Based on the growing discount feature of the convertible note, I have a feeling we will see a Spotify IPO relatively soon.

Another sign (and very interesting on its own) that Spotify may be headed for an IPO in the near future is Warner Music Group CEO Stephen Cooper’s comments to investors on February 4th. Warner owns a 2-3% stake in Spotify and Mr. Copper stated “in the event we do receive cash proceeds from the sale of these equity stakes, we will also share this revenue with our artists”.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

What do Unicorns & Micro-Caps have in common?

ratchet

The recent IPO of Square, Inc. has many taking a closer look at Silicon Valley and their “unicorns”. In  a previous blog post I discussed  how “For Unicorns, It’s a Long Road Out of Silicon Valley.” While its a difficult journey for unicorns, its a little easier on investors because of “ratchets”. If you are the CEO/CFO of a microcap public company, the ratchet concept is probably very familiar to you (although you may be familiar with terms like market conversions, downside protection, market adjustment, etc.). For those of you unfamiliar with the concept, Investopedia defines a “full ratchet” as;

“An anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.”

Simply put, ratchets allow companies to raise capital at high valuations by promising investors, that if shares are issued at a lower price, they will have their investment repriced at the new (lower) price or a discount to the new price. For public companies the ratchet is usually based on market price or some calculation thereof. For private companies the ratchet is usually based on the valuation of future private funding rounds, an IPO price, or the sale price (if the company gets acquired).

Those in the micro-cap space know that virtually every funding deal has a ratchet because of volatility in the market and substantial risk. Often, those in the micro-cap space think the ratchet is  an aspect unique to small public companies. What many don’t know is that even Silicon Valley unicorns have ratchets in their funding transactions.

According to law firm Fenwick & West LLP, about 30 percent of private unicorns have/had a ratchet in place with at least some of their investors. In the case of Square, some investors were “guaranteed returns of as much as 20 percent on their investments“. Whats more, in addition to ratchets, unicorn funding transactions also include things like liquidation preferences, board seats, and controlling preferred stock (just to name a few). If you’re a micro-cap CEO, next time an investor asks for downside protection  just sit back and smile because at least you’re not a unicorn!

 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.