At the time of writing, it has been 4 days since Snapchat formally refused Facebook’s acquisition offer of $3 billion. The main question on everyone’s mind is: Why?
General consensus agrees that Snapchat may have dropped the ball on this opportunity. Pooja, a colleague of mine, reasons in her blog post that Facebook and Snapchat are “miles apart in their positioning” and that Facebook attempted to buy Snapchat in order to “swallow the competition.” I agree with Pooja that this could be a plausible reason, but I offer an alternative perspective.
Before I explain my rationale, let’s step back in time to 2008. This is back when Microsoft attempted to acquire Yahoo! (yes, this actually happened!). At the time, Microsoft saw potential in Yahoo!’s search engine and offered a bulky 62% premium in its offer ($45 billion for a company worth roughly $27 billion). This move was done in order for Microsoft to drive critical mass, increase scale of economics, and access Yahoo!’s engineering talent to accelerate innovation.
And what did Yahoo! do? Yahoo! rejected the offer. Yes, Yahoo! rejected a ridiculously sweet deal with a 62% premium. And what did Microsoft do in response? They offered higher.
Microsoft re-evaluated its offer to Yahoo! and offered an additional $5 billion to its initial offer. Yahoo! ultimately did not accept the offer (which was a terrible decision, in my opinion) but the strategy to wait clearly worked at least once. Yahoo! ultimately pushed its requests too far, which prompted Microsoft to withdraw the offer. Although this strategy was ultimately a failure, it does show the merit of waiting to evaluate a company’s true valuation.
This strategy is called a “hold-out strategy,” at least according to discussions with my Strategic Management professor. The idea behind this strategy lies in the concept of trade, that no-one will offer a deal unless they gain some benefit from the deal. Let me put it this way. Let’s say that you have a really cool action figure, and I offer to buy it for $8. Clearly, since I offered to buy the figure, I value it greater than $8 (perhaps at $10). Your best move is to respond by offering to sell the figure for $9, which is greater than $8 but still less than $10. Assuming that no other kid on the playground has this particular toy, I may actually consider buying it.
This is how I see the Snapchat/Facebook acquisition. I do not think that Snapchat’s services are worth $3 billion, but Facebook clearly does. Relating this back to Pooja’s article, if Snapchat is really seen as a threat worth removing for $3 billion, it may be in Snapchat’s best interests to become that “bigger threat” which will prompt Facebook to consider raising its offer.
I find acquisition strategy (poison pill, white knight, etc) to be similar to a big game of “chicken.” It’s really hard to determine the real winners in such a game, so only time will tell how the course of this interaction will run.
Until next time, signing off.
-Chris