You’re Not Playing The Same Game

The genesis for this post was a recent thread on Twitter about Thrasio, which if you cut away all the press is a venture funded roll up of FBA (Fullfilled by Amazon) businesses.

The thread answered another question for me:

Who is out there doing M&A in FBA in the midst of Corona?

In other words, even though a lot of demand has shifted online, it still takes a leap of faith to pay 3-5x for a business selling barbecue mittens on Amazon. There’s just too much uncertainty.

The thread reminded me that not everyone is playing the same game, even though we might have the same pieces and the board looks the same.

Why does it matter what strategy others are pursuing?

Fundamentally, it doesn’t. But if you’re competing for the same assets and constantly see others paying way more money for businesses then you think they’re worth, it’s nice to know why.

The main reasons others over pay for online businesses, not including just basic bad valuation, “synergies”, or over-optimism:

OPM – Other People’s Money

In the Thrasio example, they raised a ton of other people’s money based on some insane thesis in the world of Amazon businesses. They’re not strictly about correct valuation, but rather putting their investor’s money to work so they can show the numbers they need to show both their investors and a possible buyer. Perhaps growth is more important to them so they pay more to acquire. Or they believe the it’s accretive to their earnings:

Arbitraging Earnings Multiples

If you’re a publicly traded company that’s profitable, you trade at a multiple of earnings (the p/e). If we look at some Digital Media companies in the wild , J2 as of this writing trades at a 17 PE  . Qunstreet trades at 66. P/E.

If J2 Or Quinstreet go an acquire an online business within their verticals at 5x earnings it will immediately (in theory, pre-covid in frothier times) add  to their earning per share and increase the market cap of the company.

Let’s take a concrete, fake example.

A digital media site does 2 million in EBITDA. It fits Quinstreet’s M&A profile and they decide to buy it. A rational owner looking to hold for the longer term decides to bid no higher then 4x, $8 million.

QNST (and obviously others) is not playing the same game. They can pay 5,6, or 7x. It doesn’t matter, because it will end up adding $132 million dollars (66 * 2,000,000) to their market cap.  If you’re an executive team largely compensated in stock and options, then it’s a no brainer.

But it’s probably not the same game you or I are playing, so you just need to stick to your valuation and move on.

Ponzi Schemes and Other Scams

I’d be remiss if I didn’t mention Ponzi schemes. In our industry the Income Store recently imploded, and they definitely were buying sites from brokers. I don’t think most buyers out there are Scams, but it’s important to realize they’re also out there, and you’re not playing the same game.

 

 

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