How The Stange and Odd World of Monetary Accounting Drives Tech Acquisitions and Investments

So first a caveat: I do know simply sufficient about monetary accounting to be harmful.  Second caveat: I’m manner, manner oversimplifying issues.

However with that out of the best way, let’s speak simply sufficient about monetary accounting to clarify why Massive Tech Firms each purchase smaller ones — and do company VC funding.

As a result of within the short-term, it usually prices principally near nothing to accumulate a smaller startup with money available, or do a company VC funding.

What do I imply?  Let’s take Salesforce for instance.  It has principally $12.5 Billion in money within the financial institution (money, money equivalents, and marketable securities) — and way more to come back in accounts receivable, one other $10.75 Billion:

However right here’s the factor: they will’t do that a lot with that $12.5+ Billion money.  For many makes use of, it’s form of trapped there on the stability sheet.

Why not?  Salesforce has dedicated to attending to 30% working margins, i.e. earnings.  And each greenback of this $12.5 + $10 Billion that it spends on salaries, on SKOs, on advertising and marketing, on engineering, on bonuse, and many others. cuts into these margins.

However .. however … investments don’t.  A minimum of, not except the worth declines.  So if Salesforce invests just a few billion in AI startups, and people values no less than don’t go down — there’s primarily no price to Salesforce.  Money goes down, sure.  However the stability sheet principally stays the identical if the worth stays the identical.

Equally, acquisitions don’t price that a lot, particularly if they’re finished with money by a BigCo with a ton of money (inventory offers with out buybacks result in dilution, and thus, decrease earnings).  A $1B acquisition appears like lots, and it’s.  But when it’s paid with money, once more first there isn’t any dilution, no less than in a roundabout way.  And second, plenty of that money can merely be transformed to different gadgets on the stability sheet, from Goodwill (see that huge, huge $48 Billion quantity above) to different asset sorts.  If the acquisition fails years down the highway, that Goodwill could must be written off, and impression earnings for 1 / 4 as a one-time expense.  However even there, it’s years later, and a one-off expense.  The headcount and different ongoing working prices do add to bills and hit earnings, nevertheless.  That’s why in M&A, acquirers could be oddly extra delicate in some ways to folks prices than deal prices.

So no BigCo needs to overpay for acquisitions or company VC investments.  However simply perceive they’re enjoying a special recreation than others.  If the worth doesn’t go down, and there’s a ton of money on the stability sheet to fund these investments — the efficient monetary price could be low and even zero.  There’s nonetheless solely a lot money to go round, however M&A and company VC are one of many few methods to make use of it with out harming earnings.

However hiring 100 engineers?  That hits your earnings and profitability instantly.


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