It seems that there have been more articles about the Facebook-Instagram M&A transaction in the last couple weeks than just about anything else. No matter what magazine, blog or newspaper we read, this M&A transaction is referenced, rehashed, and analyzed a thousand different ways.
There is an absolutely golden nugget from this whole transaction that we want to shine the light on, as it appears to have been lost or buried among the frenzied journalism. It’s something we think every entrepreneur must know and always remember: competition among highly qualified buyers is the best way to drive your business value through the roof. Instagram is a textbook and very high profile recent example of the power of buyer competition in driving a truly extra-ordinary business valuation.
About a week after Facebook announced its $1B acquisition of Instagram, a company with 12 employees and no revenue, VentureBeat’s Jennifer Van Grove broke the story on Twitter’s secret bid. She showed how that bid led to Facebook’s “we’ll buy you at any price” panicked offer. You can argue until the cows come home about how much Facebook overpaid or didn’t overpay, or about whether there is a huge bubble in the technology world right now. This article isn’t about that. This article is about reminding entrepreneurs that whenever you’re in the market looking for capital or for an exit, creating competition for your business among highly qualified and highly motivated buyers or investors is the most important thing you can do to obtain the best outcome for you and your shareholders.
If you were only watching the Instagram aftermath you may have missed another perfect example of competition in action. Great Wolf Resorts, a publicly traded company and operator of indoor waterparks with 2,500 employees and nearly $300M in revenue, received a bid to be taken private by Apollo Global Management in March. With no other bids for nearly three weeks, it appeared that Apollo was going to get the company at only about a dollar per share more than the market price before their bid. Then KSL Capital Partners, a private equity group specializing in resorts, entered the fray. Over the next couple of weeks the two bid and counterbid until Apollo finally won with an offer that was 57% higher than their initial bid. Without competition, they never would have offered as much. It doesn’t matter if the company is a high tech application, a water park company or an industrial manufacturer, competition helps entrepreneurs hold buyers accountable.
If you don’t have a system and a process for creating competition between buyers, and if you don’t have a team of advisors who can help you do that, whether it’s your board, your CFO, or a highly qualified M&A advisor, (or all the above), then you’re vastly decreasing the odds of an optimal outcome when it comes time to put a value on your business. If you think that you can just put your head down and build a great company and product and that the buyers will pay fair value, take your chances. The reality is that decent companies can drive better valuation outcomes than great companies by creating healthy and authentic competition for the deal.