Last week, I participated in a “short course” on mergers & acquisitions at Georgia Tech1. I’m not looking to merge or acquire anything any time soon, but acquisitions are a part of start-up life, so sure, why not get a business school perspective on the process.
A fun thing we did in class was an interactive simulation of the M&A process. It was surprisingly immersive and only a tiny bit hokey.
The fictional scenario in the simulation had three wine companies that were looking to make a deal between two of the companies. Each team of students represented a different wine company and you worked through background info and company financials to figure out what bid you wanted to offer one of the other companies.
Although I wasn’t feeling super confident in parsing the financials, I was surprised that I found myself getting excited as we prepared to make our bid. It turns out experiencing human emotions during M&A deals is totally normal—even if, unchecked, it can lead to some pretty bad deals—but what surprised me most was how realistic it felt.
The simulation had this feature that showed the stock price of the various companies in “real time” as news was announced to the broader “market”. So when a new bid would come in about a potential merger or acquisition, the market would react and you would see the stock price of the company go up or down. As the CEO of one of the fictional companies, it was incredibly validating to see the market react positively to our bid offer (in this fake simulation! with fake companies!). There were a few rounds of negotiating with the target company, but we finally reached a deal. The market gave us a 6% bump over our initial stock price and I was irrationally excited at our success.
Most of my career has been either technical or customer-facing, so putting on a finance hat to think about mergers & acquisitions was definitely new for me.
Amazon Got Some Warrants
In the vein of ideas that are “definitely new for me”, here’s a story called “Warrants” from Matt Levine’s June 30 edition of Money Stuff that is worth a read. (I promise I’m going to circle back and connect this Amazon story with my M&A simulation experience—bear with me). Here are a few quotes:
Amazon.com Inc. is a big company, and if it decides to partner with a smaller company it can steer a ton of revenue and attention to that smaller company. Amazon might reasonably think “we are sending all this revenue and attention to the smaller company, and they are going to profit from it, and we want to extract as much of that profit as possible for ourselves.” One way to do that is to set the commercial terms to be as favorable as possible to Amazon — pay suppliers as little as possible, etc. — but arguably a better way to do it is to (1) cheerfully create value for the smaller company but (2) buy some of that company first. 3 You bestow Amazon’s blessing on other companies, this blessing makes those companies more valuable, and your stake in them benefits from your actions.
And quoting this Wall Street Journal article:
The technology-and-retail giant has struck at least a dozen deals with publicly traded companies in which it gets rights, called warrants, to buy the vendors’ stock in the future at what could be below-market prices, according to corporate filings and interviews with people involved with the deals.
Amazon over the past decade also has done more than 75 such deals with privately held companies, according to a person familiar with the matter.
I’m not sure I know what to think. Not being a finance guy, this type of arrangement seems weird and it’s surprising that Amazon has done 75+ of these types of deals with its vendors.
Contrast
There’s a part of me that thinks that if I were a founder/CEO of a company, I would feel bullied by big ol’ Amazon coming in and demanding an ownership stake in my company in exchange for their business. “Our team has built a customer-obsessed business,” I’d think, “who are they to come in here and demand ownership of our company—nobody does that!”.
The thing about being a public company CEO, however, is that you can get feedback on the job you’re doing in real time. Quoting Matt Levine:
Well, look, here is a graph of SpartanNash’s stock price over the last year:
Can you spot the day that SpartanNash announced its Amazon contract? I bet you can! The stock was up 26.3% that day. SpartanNash added 26.3% to its equity market value, in exchange for giving as much as 15% of its equity market value to Amazon. Twenty-six is more than 15. 4 Seems like a good trade for both of them? Obviously SpartanNash would have preferred to add 26.3% to its market cap without giving any of it to Amazon, but that deal wasn’t on the table.
Huh, this feels a lot like the simulation. You really can use the market’s reaction via your stock price as validation of your decision as CEO.
Serving Customers vs Healthy Business
Last year at about this time, I wrote a newsletter called Serving Customers vs Healthy Business. I said:
I’ve been thinking a lot about how a business is focused on one of two things: serving customers vs running a healthy business. They’re not mutually exclusive but can sometimes appear to be. When trying to explain the motivations of individuals and systems within a business, it always comes down to either trying to serve customers or run a healthy business.
I find this model helpful when trying to make sense of things like Amazon’s creative financial engineering or even mergers & acquisitions. The purpose of a business isn’t to make decisions so that the stock price goes up. Rather, the purpose of a business is to create and retain a customer2. However, making decisions so that the stock price goes up is part of running a healthy business, and when you run a healthy business, you can continue to create and retain customers. And when you create and retain customers, that’s a sign that you’re running a healthy business, which can make the stock price go up, etc. etc.—it’s a virtuous cycle.
My Executive MBA program doesn’t start until August. This particular short course was offered to current EMBA students and alumni.
This is according to Peter Drucker of course. I’m a huge fan of this definition.