In Austin Powers: International Man of Mystery, Dr. Evil threatened to hold the world ransom for… $1 million. Because Dr. Evil was thinking in terms of 1960s economics, he thought he was asking for a huge amount of money.
Today, it’s not $1 million, it’s one billion. Yesterday, there were three large transactions in the communications field — each worth about $1 billion. Cerberus bought a majority stake in AT&T’s Yellow Pages business, Microsoft bought 800 patents from AOL, and Facebook purchased Instagram.
On the surface it appears as if each of these transactions was over-valued, especially to those of us who weathered the 2001 Telecom crisis. However, if you dig deeper you can see the logic behind each deal. Daniel Gross with the Contrary Indicator wrote a great analysis about why these deals made sense.
Cerberus is a private equity firm. Their primary focus is on making cash now, not for the long-term. And as hard as it is to believe in today’s world, there are still people who rely on the Yellow Pages as their primary source of information when they are considering making a purchase. In 2011 AT&T’s Yellow Pages had EBITDA (earnings before interest, taxes, depreciation and amortization) of about $ 1 billion.
Microsoft has accumulated quite a bit of cash from its legacy business – to the tune of $19 billion dollars, and more is flowing into the company on a daily basis. Most likely the move to buy the patents is defensive. Microsoft may use the patents to further its own business, but their primary value is keeping the patents out of their competitors hands.
Daniel Gross called Facebook’s purchase of Instagram a “bolt of youthful exhuberance.” In Barbara Ortutay’s article she quoted Webush analyst Michael Pachter. He said buying Instagram, not only eliminates a rival but gives Facebook technology that is gaining traction. Facebook believes that it can turn the 30 million users of Instagram into revenues and profits. In fact, it’s not quite right to say that Facebook paid $1 billion for Instagram, because a significant portion of the transaction is in Facebook stock, which doesn’t even trade yet.
So are these deals overvalued? To me it feels a lot like it did in 2001, just before the first technology bubble broke, but I’d like to think that we have learned from our mistakes the last 11 years. Perhaps, in the not-too-distant future we will all laugh about how small $1 billion dollars is.Tagged AOL, AT&T, Barbara Ortutay, Daniel Gross, Facebook, Instagram, Michael Pachter, Microsoft, Morningstar Communications, Shanny Morgenstern, Yellow Pages