Felix Salmon

Mark Zuckerberg, the Warren Buffett of technology?

Felix Salmon
Mar 26, 2014 06:06 UTC

What does Mark Zuckerberg think he’s doing, spending $2 billion on Oculus? You could take him at his word — that he sees virtual reality as “a new communication platform” where “truly present” people “can share unbounded spaces and experiences”. Basically, virtual is the new mobile, and Zuckerberg wants to get in on the game early.

But note what Zuckerberg doesn’t say, as much as what he does. There’s no mention of “social”, no mention even of “Facebook”. Zuckerberg is one of the greatest product managers in history, but his legendary focus is nowhere to be seen here: it’s all big, vague, hand-waving futurism. And note too one of the quieter members of Zuckerberg’s board of directors: Donald Graham, the CEO of what used to be called the Washington Post Company, and old friend of Warren Buffett.

Buffett, of course, is the classic conglomerator: he’ll buy any business, so long as it’s good. Graham is similar: he inherited a grand media property, and added on all manner of unrelated businesses. Eventually he sold the Washington Post to Jeff Bezos, for $250 million — and is still the CEO of a company, Graham Holdings, which is worth more than $5 billion.

Is it too early to declare that Zuckerberg has ambitions to become the Warren Buffett of technology? Look at his big purchases — Instagram, WhatsApp, Oculus. None of them are likely to be integrated into the core Facebook product any time soon; none of them really make it better in any visible way. I’m sure he promised something similar to Snapchat, too.

Zuckerberg knows how short-lived products can be, on the internet: he knows that if he wants to build a company which will last decades, it’s going to have to outlast Facebook as we currently conceive it. The trick is to use Facebook’s current awesome profitability and size to acquire a portfolio of companies; as one becomes passé, the next will take over. Probably none of them will ever be as big and dominant as Facebook is today, but that’s OK: together, they can be huge.

Zuckerberg is also striking while the iron is hot. Have you noticed how your Facebook news feed is filling up with a lot of ads these days? Zuckerberg is, finally, monetizing, and he’s doing it at scale: Facebook’s net income grew from $64 million in the fourth quarter of 2012 to $523 million in the fourth quarter of 2013. At the same time, his stock — which he is aggressively using to make acquisitions — is trading at a p/e of 100. If you’re going shopping with billions of dollars in earnings multiplied by a hundred, you can buy just about anything you like.

Eventually, inevitably, Facebook (the product) will lose its current dominance. But by that point, Facebook (the company) will have so many fingers in so many pies that it might not matter. Zuckerberg, here, is hedging. Oculus might be valuable to Facebook if the social network grows. But it will be even more valuable to Facebook if the network shrinks. Zuckerberg has seen the astonishing speed with which products come and go online; he knows that his flagship won’t last forever. So he’s decided to build himself a flotilla.


Just because Warren Buffet can pick stocks doesn’t mean he has a good judge of character! He’s with Obama. He has to be senile or just stupid to involved with Obama. Maybe he’s a communist too

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Why BBVA is good for Simple

Felix Salmon
Feb 20, 2014 17:42 UTC

Simple began in July 2009, but it took three years before it was ready to actually start sending its debit cards out to members of the public. And now, after just 18 months as a scrappy independent financial-services provider, it’s being bought, for $117 million, by Spanish banking giant BBVA.

This is not the billion-dollar exit that Simple’s VC backers dreamed of; one source told Ellis Hamburger that “they had kind of run out of steam” of late. But that might actually be a good thing, in the long term, for Simple: I suspect that Simple is actually going to be much better off within BBVA than it was up until now.

The first and most obvious reason is that Simple is now, finally, what it always wanted to be: a bank. When CEO Josh Reich first started talking to me about his retail-banking dreams, in September 2009, he didn’t want to be a pretty app sitting on top of someone else’s bank: he wanted to be a bank. And now, finally, that’s what he is.

BBVA is also, in many ways, the ideal parent for Simple. It’s technologically forward-thinking, which means it’s going to be more receptive than Simple’s current partner, Bancorp, in terms of providing the technical ability to do lots of clever, real-time things. It also gives its subsidiaries a huge amount of autonomy and freedom: it has a holdco structure, rather than the kind of command-and-control structure you might see at, say, Citibank. It is a very long-term investor: it’s buying Simple for ever, not so that it can flip it for a profit in a few years’ time. And finally, it is one of the most international banks in the world, which is going to make Simple’s global expansion a lot easier.

Simple’s business is highly capital-intensive, and BBVA has capital: the purchase price is already more than the $100 million that BBVA promised last year to invest in innovative companies, and you can be sure that BBVA is going to invest a very large chunk of money in Simple after having acquired it. That money isn’t going to require VC-level returns; BBVA will, rather, ask only that it creates an innovative new bank which can expand globally and which the rest of the BBVA network can learn from. (Certainly the Simple card is leaps and bounds ahead of BBVA’s rival SafeSpend card.) To date, Simple has raised a total of $15.3 million in capital; BBVA’s total future investment in the company is likely to dwarf that sum, and allow Simple to create products — like its long-promised joint account — much more quickly.

One criticism of this deal is that it reduces consumer choice, but I don’t buy it. For one thing, very few people are choosing between Simple and Compass, BBVA’s US arm. And for another, insofar as there are such people, the choice still exists: Simple will remain a standalone entity, and will compete with Compass as much as it does with any other bank.

That said, there are always downsides to any deal. For one thing, Simple will lose a very large chunk of its current revenues: as part of a big bank, it will now be subject to Dodd-Frank limits on debit interchange fees. It will also, as a bank, have much more regulatory oversight than it’s had up until now — and regulators always slow down the pace of innovation. (Rightly so.) Will Simple’s friendly customer service and full-of-personality Twitter feed be able to manage the onslaught of compliance officers that this change is going to bring? I hope so, and Simple certainly wants that to be the case, but it’s far from certain.

Meanwhile, Silicon Valley has moved on, with payments companies, rather than banks, getting the bonkers valuations. (Stripe: $1.75 billion; Square: $5 billion.) Simple has a payments capability of its own, but it’s still nascent, and it does seem that banking doesn’t scale quite as quickly as the VC world would like it to. After all, it’s very rare that people change their bank: doing so is much harder than, say, switching your credit card.

Building a huge new bank takes more time, and more money, than Silicon Valley likely has. BBVA, on the other hand, has both the patience and the capital to make Simple’s dreams come true. That doesn’t mean that Simple is going to achieve all of its ambitions, of course. But it’s probably better-placed to do so today than it was yesterday.

Facebook’s horrible, stroke-of-genius IPO

Felix Salmon
Feb 20, 2014 15:28 UTC

Two years ago, before Facebook went public, I wrote a feature for Wired with the title “For High Tech Companies, Going Public Sucks”. It was illustrated with this Mark Zuckerberg sadface:


As it happened, going public did suck for Mark Zuckerberg — much more than even I thought that it would. But, like many things which look really horrible at the time, it turns out to have been the best thing that Zuckerberg could have done. Facebook, today, has a real chance of sticking around and dominating the world for many years to come — and it only has that chance because it went public when it did.

The reason is simple enough to be summed up in one word: mobile.

At the time of the Facebook IPO, 21 months ago, the markets knew full well what the biggest challenge facing Facebook was. The desktop product was wildly popular, but the mobile product wasn’t, and it was far from clear how Facebook could thrive in a world based around the smartphone. Zuckerberg had one job above all others: manage the transition to mobile, and do it as fast and as aggressively as possible.

And that’s exactly what he did.

By the time last quarter’s earnings came out, Facebook was getting 53% of its revenue from its 945,000,000 mobile users: nobody saw that coming at the time of the IPO. Facebook has monetized mobile better than any other website in the world, and its in-stream native ad units are impressively powerful. Brands aren’t buying them because they feel the need to be cool, they’re buying them because they work.

Zuckerberg, however, wasn’t satisfied with purely financial metrics. Mobile is a completely different world, and the move from desktop to mobile, for Facebook, had to be — and had to be seen to be, both internally and externally — as the central, company-defining strategy of the 2010s.

The technology world moves fast, and companies need to be able to change or die. If you change, then you can thrive: look at Netflix, for instance, a far cry from its DVDs-by-mail roots, or look at IBM, which has managed to pivot from making PCs to, um, whatever it is that it does now. (I’m a bit unclear on what that is, but the numbers speak for themselves: it made $16.5 billion of profits in the last 12 months, on revenues of $100 billion, and has an enterprise value of $220 billion; its share price is higher than it was even at the height of the dot-com bubble.) Look, most canonically, at Apple, which transitioned with spectacular success from making computers to making phones.

Or, alternatively, look at Microsoft.

Zuckerberg knew, circa Facebook’s IPO, that his company was not good at mobile: it didn’t have the problem solved. And he knew that asking his existing corps of engineers to turn their attention to mobile would probably not work. But the good news was that he was now running a public company, with lots of cash, and a highly-valued acquisition currency in the form of Facebook stock.

The world of mobile is in large part a lottery. The most successful products aren’t the best-made; they’re just the ones which managed to catch on, for whatever reason, and generate positive word of mouth. The perfect example: Flappy Bird, a game written in a single day, released with no fanfare onto the iOS app store, which went absolutely nowhere for over a year, before suddenly exploding in global popularity for basically no reason.

Facebook bought Instagram for $1 billion in 2012 not because the product was particularly great, but because the product was insanely popular. The same when he offered $3 billion for Snapchat. Sometimes, lightning strikes. And while Facebook is happy writing its own mobile apps in the hope that lightning will strike them, it knows better than to count on such a thing happening. If you want to be certain that hundreds of millions of people are using your mobile products, the only way to do that is to buy mobile products which hundreds of millions of people are using.

Facebook’s acquisition of WhatsApp sums up Zuckerberg’s strategy perfectly. WhatsApp is an ugly, clunky product with a juvenile name; there are dozens of prettier, smoother, more elegant mobile messaging apps out there. But, even more than Instagram, it’s also insanely popular: think of it as the Drudge Report of messaging apps. Facebook itself has never put much stock in elegance: its own site has always been pretty cluttered, mainly because it turns out that cluttered and ugly often works really well. (Look at any Chinese portal.) There is nothing intrinsic to the WhatsApp product which Facebook hasn’t already developed on its own. But WhatsApp has hundreds of millions of incredibly loyal users, all over the world, and that’s all that matters.

The price, of course, is high. But most of it is being paid in Facebook stock, with the cash component coming easily out of Facebook’s massive cash pile. Issuing Facebook stock, especially if doing so buys you the future, in terms of a young global user base, costs Zuckerberg effectively nothing: the share price is basically flat today, while it would surely have fallen much further had, say, Microsoft bought WhatsApp instead.

But that’s the difference between Facebook and Microsoft. Zuckerberg is the same generation as the people building today’s most popular mobile apps: he speaks their language, and he lives in the Bay Area, where they live, and — most importantly — he has complete control of his company, so if he decides that he wants to drop $19 billion on company with 55 employees, he can go ahead and do just that in a matter of days. At Microsoft, such a deal would probably be brought to some M&A person by a banker, and Microsoft would spend months kicking the tires, and there would be endless meetings about whether to do the deal and how much to pay, and the target company would get so frustrated over the course of the process that it would probably end up saying no regardless of what the eventual offer price was.

The WhatsApp acquisition is a statement by Zuckerberg that mobile matters more than money. He’s right about that. Without mobile, it doesn’t matter how much money Facebook has. If you’re asking whether Zuckerberg paid too much for WhatsApp, you’re asking the wrong question. Zuckerberg is sending a message, here, that Facebook will never stop in its attempt to dominate mobile — that no amount of money is too much. Zuckerberg has money — and, thanks to the IPO, he can even print money, if he wants, by issuing new Facebook stock. He’s playing large-stack poker, and he’s playing it in textbook manner. I, for one, wouldn’t want to be competing against him.


@ckm5, it sounds like you are assigning a value of $0 to the stock portion of the deal. If that is realistic, then Facebook is grossly overvalued.

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When patient money is big money

Felix Salmon
Jan 14, 2014 07:18 UTC

As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same…

If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long term view.

With these words, Google went public in 2004 — and they have, since then, been true to their word. They have not been maximizing short-term profits; neither have they been stinting on long-term investments, especially in projects like the self-driving car which might not pay dividends for a decade or more. Today, Google spent $3.2 billion to acquire Nest. Once again, they’re investing for the long term.

On the same day, Suntory spent even more money — a whopping $13.6 billion in cash, plus another $2.4 billion in assumed debt — to buy Beam, a coveted whiskey company. Suntory doesn’t need to worry about what its public shareholders think, because it doesn’t have any. It’s privately held, and can spend its money on anything it likes, while keeping an eye on long-term value rather than short-term profits.

Neither of these acquisitions makes sense if you approach them wielding earnings multiples or net present value calculations. I very much doubt that Nest has made a penny of profit in its entire existence, and the acquisition price works out at roughly $2,900 per Nest-boasting home, based on estimates that there are 1.1 million such homes. Meanwhile, Beam sold for 20.5 times ebitda, and 6.4 times revenue. And it’s not like some huge revenue boost is around the corner: the sale price even works out at 5.3 times estimated 2016 revenue. Neither of these deals are going to pay for themselves any time soon.

But that doesn’t mean that they’re bad deals. Both of them are attempts to, quite literally, buy the future. The case of Nest is pretty obvious: it’s the foremost company in the hot Internet of Things space, and in its short life has already built up a valuable and much-loved brand. Its products are expensive, but they’re very good-looking, and the user experience is fantastic. Nest is basically the OXO of internet-connected household gewgaws, and if it were to release a lightbulb, I’d buy dozens of the things in a heartbeat. Similarly if it offered to replace my alarm system.

Google is drowning in cash: it has more than $58 billion to spend, so this acquisition barely makes a dent in the company’s war chest. And if the price is high, it is also ratified by the market: Nest would have had no difficulty raising hundreds of millions of dollars in new equity at a $3.2 billion valuation or even higher. Most excitingly for Google, it has now poached dozens of former Apple employees, all of whom understand how to design great consumer hardware in a way that Google clearly doesn’t. If just a little of that magic rubs off onto, say, Motorola, that could justify the acquisition price right there.

Meanwhile, from Nest’s point of view, this deal gives the company room to concentrate on developing great products, without being distracted by corporate affairs, patent wars, and the like. Google’s lawyers can now deal with all of Nest’s legal and licensing headaches, and Google’s lawyers are not only very good but also have very deep pockets.

The Beam acquisition is also at heart about brand value: Jim Beam, Maker’s Mark, Laphroaig, Courvoisier, Sauza — these are resonant, deeply valuable brands, and they’re brands which are only going to rise in value over the long term. Bourbon, in particular, is an incredibly hard market to break into, thanks to the many years it needs to spend in barrel before it’s bottled. Beam’s revenues are being artificially constrained, right now, by the fact that it can’t sell more bourbon than it made seven years ago. But it has been ramping up production of late, and will surely continue to do so now it’s owned by Suntory: the Asian market in general, and China in particular, is potentially almost unlimited.

In other words, Suntory isn’t spending some multiple of 2013 earnings, or even 2016 earnings: it’s looking to the 2020s and beyond, and it’s betting that no matter how much it pays now, it’s more than worth it for the advantage of being the first Asian company to own a major bourbon brand, in a world where demand for bourbon is sure to continue to rise inexorably.

The Suntory deal is similar to the Google deal in another way, too: neither company values balance-sheet cash particularly highly. In Google’s case that’s just because the company has so much of it; in Suntory’s case that’s because Japan is — still — stuck in a liquidity trap. A Japanese company with cash is a bit like an American traveler with frequent-flier miles: it’s always a good idea to spend today, because the currency will be of less use to you tomorrow.

There aren’t all that many companies out there which are dominant in spaces which are clearly going to be huge tomorrow, be they the Internet of Things or bourbon. So we’re not going to see a lot more takeovers at these eye-popping valuations. But if there’s one big lesson to be drawn from today’s M&A activity, it’s that there’s still serious amounts of strategic cash on the sidelines if the right target comes along. As Charter’s $37.3 billion bid for Time Warner Cable proves.


Google is a perfect example of a company who takes a long view, amid the most recent acquisitions: Boston Dynamics and Nest. But that´s not the whole story, not by far. As every other big company, Google is constantly facing competition from medium and little companies, most of all startups. The problem lays over the asumption that nobody can foresee the future, accordingly, a small company can disrupt the market and leave a giant like Google out of business. That´s why these giants constantly buy small companies, mainly out of fear that their businesses could be in jeopardy, and not because they intend to develop any new strategy or a long term view prevails. Nest and Boston Dynamics appear on the news because, among other things, they were not cheap, but a closer look into all the companies that Google buys reveals a completely new approach, just last year Google bought 21 companies and none of them were on the news. I have doubts that a big strategy was put in place for each one. So yes, Google takes the future very serious and have made interesting and long term investments, but the facts prove patience is not always the way to go.

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When airlines don’t compete

Felix Salmon
Nov 18, 2013 16:00 UTC

James Stewart is not happy about the settlement which allows American Airlines and US Airways to merge.

A bit of context: Historically, the US government has smiled on the national airlines, allowing them to merge when they want to, and bailing them out in times of trouble. (They got $15 billion, for instance, after the 9/11 attacks.) But in August, all that changed, quite suddenly and unexpectedly. The Department of Justice, along with a smattering of state attorneys general, sued American Airlines’ parent company AMR and US Airways, saying that their proposed merger would cause “substantial harm to consumers”. At the heart of the suit was the idea that American and US Air currently compete head-to-head on “thousands of heavily traveled nonstop and connecting routes”, which benefits consumers; and that consolidation in the airline industry more broadly “would make it easier for the remaining airlines to cooperate, rather than compete, on price and service”.

The final settlement, however, as Stewart notes, fails to address any of those concerns. Instead, the merger will basically be allowed to go ahead as planned, in return for the merged airlines giving up 104 landing slots at National airport in Washington DC, as well as a smattering of other airport assets. This is not a huge concession: US Air is currently the largest airline at National, and after the merger and divestitures it’s going to be even bigger there than it is right now.

Stewart’s narrative is a perfectly reasonable one: the normally-supine regulatory apparatus briefly raised an eyelid and snarled, but just as quickly rolled over and went back to sleep. This constitutes, says Stewart, a “baffling about-face”, although in reality it’s more like two about-faces, with the Justice Department pretty much ending up exactly where it started.

The question is, which position is preferable? There are basically two ways of looking at airline competition, and it’s pretty clear that Stewart prefers the one in August’s Justice complaint, which is admittedly the more intuitive one. Under this view, the amount of competition can be measured pretty easily, by looking at two numbers: how many big airlines there are, and how many routes they compete on. Looked at that way, there’s less competition in the US airline industry now than in living memory: Delta merged with Northwest, United with Continental, and now American with US Air. Even Southwest bought AirTran. Once the latest merger is complete, the four merged companies between them will control some 80% of domestic air service — and there’s very little indication that the three largest carriers have any particular inclination to compete on price.

But in a way, that’s exactly the point lying behind the other way of looking at airline competition. The big legacy carriers don’t compete on price at the moment, when there are four of them, and they won’t compete on price in future, when there are only three. In fact, big legacy carriers rarely compete on price. The only airlines which are built to compete on price are so-called “low cost” carriers — and the only way to encourage the formation of such creatures is to open up landing slots for them, in deals like the one that Justice just did. Those 104 slots at National, for instance, can’t go to Delta: they have to go to smaller upstarts — the kind of airlines who can and will compete on price. Under this view, the only way to create real competition in the airline industry is for there to be a lot of new airlines. Think Europe. Some of those new airlines will fail, but as a group, they will provide downward pressure on prices in a way that legacy airlines never could — especially given their legacy obligations.

I’m inclined to pessimism on both fronts: I think that merging US Airways and American will surely mean less competition and higher prices, at the margin — and I also think that the national dominance of the big legacy carriers makes it very difficult for any new airline to succeed. If you look at the history of airlines like JetBlue and Virgin America, they tend to start off with high hopes, but it doesn’t take long for their prices to start rising up to big-carrier levels. At that point, they compete mainly on service rather than price, which doesn’t make it any easier to attract the millions of travelers who feel locked in to a big carrier’s loyalty program. (Indeed, the economics of the airline industry are a bit like the economics of gas stations: where gas stations lose money on gasoline and make all their profits on convenience-store sales, legacy airlines lose money on the actual flights, while making all their profits from their loyalty programs, selling miles to credit-card companies and the like.)

The American-US Air merger, then, is surely going to be bad for prices, overall, especially out of airports other than National and LaGuardia. And the concessions aren’t going to be remotely enough to kick-start a new wave of low-cost airline startups.

The real problem here is that the root-cause bad decision was made in 2001, when the US government decided to bail out the legacy airlines rather than letting them fail. If they had failed, there would have been a period during which flying around the country would have been a lot more difficult. But it wouldn’t have taken long for a lot of smaller airlines to be created in order to fill that need. And we’d all be in a much better place right now. At this point, however, the chances for real competition in the airline industry have never been lower — regardless of what the Justice Department does.


Your last paragraph warms my heart.Do you hold the same position towards the auto company bailouts and federal assistance.

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Why Yahoo-Tumblr makes sense

Felix Salmon
May 20, 2013 14:47 UTC

Amidst all the positivity coming out of Yahoo and Tumblr, any self-respecting pundit is going to want to pour cold water on the whole deal. Especially since billion-dollar mergers almost never work out very well. But here’s the weird thing: the more I look at this tie-up, the more it makes sense to me.

Yahoo has more than enough money to pay for Tumblr in cash, which is exactly what it’s doing. Here’s one easy way of seeing why this is a good deal for Yahoo: profitable tech companies (think Google, or Apple) tend to have too much cash and tend not to know what to do with it — with the result that it just sits there, uselessly. For Yahoo, having $4.4 billion in cash plus Tumblr is clearly going to be better in terms of the future than having $5.5 billion in cash, waiting interminably for some kind of Godot to come along and be bought. $1.1 billion is a lot of money, but it’s not so much money that it’s going to change the way that investors look at Yahoo’s balance sheet.

More fundamentally, Yahoo is acquiring 300 million young, mobile users at a stroke — along with invaluable information about what they like to consume online, and how they like to consume it. It’s a four-fer, in fact.

First, there’s the immediate traffic boost.

Second, there’s the ability to use Tumblr’s data to help optimize the rest of Yahoo’s pages. If I’m logged in to Tumblr, as I normally am, then when I go to Yahoo, I should see the kind of material that Tumblr knows I’m interested in, rather than some one-size-fits-all generic home page.

Third, Tumblr is Marissa Mayer’s opportunity for a Flickr do-over. The big portals have been extremely bad at building out genuinely interactive properties in the age of self-expression, and Tumblr knows how to attract a new generation of users who want to create rather than just consume.

And finally, Tumblr is the perfect platform for Yahoo’s brand advertisers to use if they want to start building up relationships with consumers, rather than just bombarding them with banner ads. (My friends at Percolate, an official Tumblr partner which was designed to solve this stock vs flow problem, are incredibly well placed to be huge winners from this deal.)

From Tumblr’s point of view, founder David Karp has extracted many promises from Mayer that she will leave the company alone, in New York City, to do its thing. “We’re not turning purple,” he says. More importantly, Karp can now outsource to Sunnyvale a lot of the gnarly monetization problems which the NY team was only slowly beginning to solve. The plan right now — which might change — is to give Tumbloggers the option to start running ads on their sites, presumably with some kind of revenue-sharing deal. But from day one, Yahoo’s sales team could simply start insisting that any brand wanting to buy ad space on the Tumblr dashboard will also have to buy a bunch of space on the Yahoo network. That’s a great way of leveraging the amount of money that Tumblr brings in.

And then of course there are the itchy VCs: Tumblr raised its first money back in 2007 at a $3 million valuation, resulting in a glorious 365X return for early investors including Fred Wilson and Jacob Lodwick.

Lodwick is on the record saying that acquisitions like this one are always a failure for the company being bought: “Big companies aren’t just big versions of small companies,” he writes. “They’re another class of entity entirely, more concerned with sustaining their own rhythms and control structures than experimenting with strange ideas from acquired ex-founders.” But part of the deal you make, when you accept VC funding, is that there will almost certainly be an exit within 5-10 years, and it will almost certainly not be an IPO where the founder retains control. This kind of exit, where the company is big enough to retain a modicum of independence, is the least bad outcome that Karp could realistically achieve.

It won’t be easy: as Peter Lauria points out, Yahoo’s decision to ban Kara Swisher and Peter Kafka of All Things D from the press announcement is exactly the kind of heavy-handed corporate meddling that Lodwick is talking about. And Tumblr’s users are predictably unhappy about the whole thing. But Yahoo certainly has the tools to help boost Tumblr’s flattening traffic numbers, while Karp should be able to retain enough control of Tumblr that his users don’t revolt entirely. After all, it’s far from clear where else they could go.

Most mergers fail, and this one could fail as well. But on the spectrum from “obviously doomed” (NewsCorp/MySpace) to “obviously sensible” (Google/YouTube), I’d put Yahoo/Tumblr well within the “sensible” half. Which is rare enough to be noteworthy.


“profitable tech companies (think Google, or Apple) tend to have too much cash and tend not to know what to do with it — with the result that it just sits there, uselessly.”

A nasty consequence of not paying much in taxes, shall we say… Why do you allow us to forget that this money has been stolen from the American (and most likely a few other countries’) public(s)?

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Chart of the day: Warren Buffett’s bolt-ons

Felix Salmon
Feb 26, 2012 18:21 UTC


Reading Warren Buffett’s latest shareholder letter, I was struck by the number of times he talked about bolt-on acquisitions — situations where one of his subsidiary companies makes an acquisition of its own. They’re mentioned six times in this letter, and then at the end he mentions a “tuck-in” acquisition, which is essentially the same thing.

I wondered if he’d ever been so keen to talk about such things in the past, so I called up the last ten years’ worth of shareholders’ letters. He’s never used both terms in the same letter before, and he’s never used the term “bolt-on” more than once.

This could of course simply be random variation, but I think that something important is going on here. The big question, with Berkshire Hathaway, is how it’s going to invest its billions of dollars, especially now that companies like Swiss Re, Goldman Sachs and General Electric are exercising their options to return billions of dollars of emergency funding from Berkshire.

In the past, Buffett has talked about spending enormous sums buying very large companies: last year, for instance, he said that Berkshire will need “major acquisitions” (his emphasis), adding that “our elephant gun has been reloaded, and my trigger finger is itchy.”

This year, there’s no talk of elephants. Instead, various bolt-ons are scattered throughout the letter, Princeton Insurance being the only one mentioned by name. The rest are relatively small and anonymous. But I see a message here: just because you don’t see Berkshire bagging elephants, that doesn’t mean it isn’t growing by acquisition. It probably is, but just at the level of subsidiary companies, buying other companies you probably haven’t heard of and which probably aren’t big enough to warrant Berkshire’s shareholders being told the details.

Essentially, Buffett is saying “trust us: we’re growing, even if you can’t really see it.” But what you can see is the change in his language. The only real difference between a bolt-on and a tuck-in is that a bolt-on sounds bigger and more important. And so after using the term “tuck-in” seven times between 2006 and 2008, he’s now largely abandoned it. And the bolt-ons are coming thick and fast.

John Hempton singles out one 2002 acquisition which Buffett made and which has been extremely successful — but the fact is that the company in question was bought for $139 million and is now worth maybe $1 billion, after throwing off $180 million in cash. That is indeed impressive, but it doesn’t move the needle for a company with a market capitalization of $200 billion. You need a lot of such acquisitions to do that, and they don’t scale: they’re hard to find, and don’t come along every month.

At the beginning of every annual letter, Buffett compares the performance of Berkshire Hathaway’s book value to the performance of the S&P 500. Here’s two ten-year periods: on the left is 1973-1982, and on the right is 2002-2011.


What you’re seeing here is something that Buffett makes no secret of: it’s much easier to grow very fast when you’re relatively small than it is when you’re huge. Check out that run of growth beginning in 1975, in the first column: it’s simply astonishing. And even the relatively modest performance in 1973 and 1974 looks fantastic when you compare it to what the rest of the market was doing.

Buffett’s kept his ability to stay conservative and outperform in down markets. His two best years of the past ten, if you look at the “relative results” column, were — by far — 2002 and 2008, when the broad stock market fell a lot, but Berkshire’s book value did much better. And that’s largely an apples-to-oranges test in any case: after all, the book value of the S&P 500 didn’t fall nearly as much as its market value either.

If you look at Buffett’s own favored metric, the per-share book value of Berkshire, he’s had some good years of late, but nothing which even comes close to the numbers he was posting in the 70s.

That’s to be expected: big, mature companies don’t grow as fast as the best small companies. But when you’re a public company, shareholders’ desire for growth never goes away. Especially when, as at Berkshire, the stock doesn’t pay any dividends. As a result, every year Buffett does two things in his letter to shareholders. Firstly, he tries to downplay expectations as to how fast Berkshire is going to be able to grow going forwards. And secondly, he tries as best he can to explain where the future growth they want is going to come from. He’s consistent on the first part. But on the second he moves around a bit more. And this year, the message is that he’s going to encourage his subsidiary companies to make lots of acquisitions.


Sorry, one more thing I forgot to mention.

Felix: Thank you for this write-up. I appreciate the fact that you provided in-line links to each PDF you cited, the B-H annual shareholder updates. I would not have had the opportunity to access those otherwise. Well, not easily. (David’s comment made me remember to mind my manners better).

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What does Google want with Zagat?

Felix Salmon
Sep 8, 2011 16:38 UTC

Why is Google buying Zagat, a company which has failed miserably online, rather than, say, Yelp or Tripadvisor? I suspect a lot of the reason has to do with its pseudoscientific ratings, on a 30-point scale: Google loves being able to quantify stuff. But those ratings are silly: they’re not at all comparable between markets (try a sushi joint in Long Island and then compare it to one in New York City with an identical food rating), and they suffer from enormous inflation.

On top of that, the one concrete datapoint that Zagat does provide — the cost estimate — is simply dreadful. Steve Cuozzo exposed this five years ago, and nothing has improved since then — you will basically never get out of a restaurant for the ridiculously low price that Zagat purports to think that a meal costs.

Zagat is mainly useful as a source of phone numbers and opening hours — information Google Places already has. Yes, it has a trusted reputation — but Google has that, too. And it has a massive global print-publishing business; I can’t for the life of me imagine why that’s something that Google wants to get into.

Most puzzlingly of all, Google’s Marissa Mayer refers twice in her short official announcement to Zagat’s “insight” — it’s “impressive” at first mention, and “tremendous” at second. Does anybody have a clue what she’s talking about? Zagat doesn’t do insight — that’s simply not the business it’s in.

So color me very confused at this weird entry into what looks very much like Old Media — something which was very useful before the mobile internet came along, but which has already been comprehensively disrupted by Google itself. Google is the future of information; Zagat is the messy and conflicted past.

Ethical questions about the Zagat guide abound — about the way that restaurants game their ratings, the things that diners will do for a free guide, and the way that Tim and Nina Zagat themselves are extremely chummy with the restaurateurs they’re judging in a supposedly objective manner. I hope Mayer and Google know what they’re doing, here. But it makes no sense to me.


It is simple housekeeping…Google just bought an old house in Beverly Hills with a famous history that they are going to remodel to beat the latest hottest competition in that neighborhood. Google eats micro and spits out macro. Personally, I think they should rethink their strategy. People are totally overwhelmed by the macro chaos of social media and the internet. They want and need micro to stand on and calm the storm. When I hear GOOGLE now I can not even think through all they have and do. When I think Facebook, I think friendly neighborhood. When I think Yelp, I think livable neighborhood. When I hear GOOGLE, I think BLACK HOLE in the universe.

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How being public eases acquisitions

Felix Salmon
May 10, 2011 06:00 UTC

The acquisition of Skype by Microsoft comes just in time for the Capitalyze conference in San Francisco, which I’m sure will be talking about this:

The biggest winner of this deal could actually be Facebook. The Palo Alto-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds — it gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

If Om’s right about this, then Facebook is just plain lucky that deep-pocketed Microsoft came along to keep Skype out of Google’s hands. If Facebook were public, on the other hand, then it could have just snapped Skype up itself.

I’ve already said that Facebook will go public — but for boring technical reasons, rather than for big strategic reasons like this. And so the question arises: is Om right? Does being public give companies the ability to make large strategic acquisitions, which are impossible so long as they’re private?

This particular case, like so many other cases where Facebook is involved, is exceptional. Skype’s owners, including Silver Lake Partners and Andreessen Horowitz, might well have been quite well disposed towards a deal where they sold Skype to Facebook and got a large yet illiquid chunk of Facebook in exchange. But I’m not sure if that’s even possible, the way that those funds are set up in Silicon Valley: while Silver Lake and Andreessen Horowitz are indeed investing in the likes of Facebook, they’re investing their new funds in those companies, rather than the old funds which invested in companies like Skype and are now reaching maturity.

In any event Om’s point is a good one: if a private company wants to make a big acquisition, that’s a lot easier if your stock is public than if it’s private.

Staying private, then is something which companies might like to do for much longer than they did in the past. But if you’re extremely ambitious and want to grow through the acquisition of large companies, then you pretty much need to be public. Look at Glencore: it desperately wants to buy Xstrata, and the only way it can see of doing that is by going public first.

I’m not entirely clear on why this should be. After all, private-equity companies make enormous acquisitions all the time, and they’re not public. (At least the funds making the acquisitions aren’t public.) It makes for an interesting intellectual exercise to wonder whether Facebook could borrow $7 billion or so to buy Skype, if it were so inclined. But of course it isn’t so inclined: that kind of leveraged buyout makes no sense in Silicon Valley, and Skype would be crushed under such a debt burden. The only remotely sensible way to borrow the money would be if it were a bridge to an IPO, and then at that point you might as well just IPO first.

But the lesson of Skype is that you never know when a big strategic opportunity might arise. And when it does, there will be some part of you wishing that you were public, if only for the option value it confers.


Having a currency to use in acquisitions is a rationale often used by investment bankers when discussing IPOs with private companies. As you’ve pointed out, it’s not just a sales line.

As for why this deal might make sense for MSFT, check out this blog: http://bit.ly/mluvHm

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