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Welcome to the Land of Irrationality

May 19th, 2008
by Lou Paglia.

My morning today started with a cup of coffee and seeing Robert Scoble’s tweet and related post regarding the rumors flying around Microsoft/Yahoo and possibly Microsoft/Facebook, started via John Furrier’s post.  And I found myself in sheer disbelief.  Not because I do not think Microsoft isn’t being intelligent about its online strategy.  Not because of what a great product Facebook has built.  But simply because it is placing yet another face on the irrational valuations being thrown around, $20 BILLION! for Facebook.

Sorry, I love Facebook but this simply strikes me at late nineties irrational valuations but an new stratospheric levels.  Of course this is a rumor and very inline with the 1% valuation Microsoft has already placed on the company but buying 1% and buying the whole enchalada at that valuation are two completely different things.  And I’m sure Microsoft has a team of folks a lot smarter than me doing IRRs, synergy analysis and long-term value analysis on what Microsoft can do from a revenue perspective overall with a great site like Facebook in its arsenal (not to mention it from a defensive maneuver against its core business).

To me, this is the Alex Rodriguez signing brought to the Internet.  The Rangers signed him, 10 years $275M.  The Yankees just parlayed that into 10 years, $325M.  Rodriquez, great player (Facebook).  Yankees, great franchise (Microsoft).  But completely off-the-grid and irrational.  Keeping the sports metaphor going and trying to put such an aquisition in perspective:  Microsoft could buy the TOP 18 NFL Franchises for the price of Facebook and those franchises have a cumulative revenue stream of $3.88B! (according to Forbes).

Think about it from that perspective.  The top 18 storied franchises in football with the likes of the Cowboys, Giants, Bears, Patriots, Redskins, Jets, Packers and Steelers to just name a few.

I see such an acquisition and such a valuation as crazy.  Bad for the web overall (for another post).  Potentially bad for Facebook and its users (again, another post).  And for that, I do not (or at least hope I do not) see this happening.  Sara Lacy doesn’t see it happening for different reasons.

UPDATE:  More conversation and interesting points on this topic at TechCrunch.

Posted in: strategy, Uncorrelated.
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  • http://furrier.org John Furrier

    I'm with you on the valuation but if Msft was willing to poney up 41 billion to get yahoo they might be willing to grab the yahoo search and facebook for a price in that range.

    Microsoft is crunching the spreadsheets and SIA had a post that Google's search revenue will soon surpass the revenues in the bellweather monopoly windows franchise..Microsoft has to kill Google or reduce their position in the market… Facebook is a pawn..an expensive pawn

  • http://www.loupaglia.com/correlate loupaglia

    John: I'm with you. Once the rationalization occurs that you are spending $41B on an online asset, making the strategic decision to split that asset up on Yahoo! Search and Facebook isn't much of a leap. But that is already saying you justified $246M for 1% and then another justification that $20B is justified for Facebook (expensive pawn or not).

    Couple of points:
    1. It is a very dangerous strategic game to justify getting so heavy into online search simply because Google is making money doing so. Even if it is more money than the windows franchise.
    2. Online search and windows are two different businesses so I'm not clear on why any comparison of the two revenue streams should be made.
    3. Is there a guarantee that you are a immense player in search long-term by placing a $41B bet on yahoo! search and Facebook? Right now, I'd say it isn't a sure thing and it better be at that price tag.
    4. Will Facebook acquisition help with the Office franchise? Because MSFT needs to have a strategy there against Google Apps as well. I'm not sure Facebook is the answer here either.

  • http://furrier.org John Furrier

    I'm with you on the valuation but if Msft was willing to poney up 41 billion to get yahoo they might be willing to grab the yahoo search and facebook for a price in that range.

    Microsoft is crunching the spreadsheets and SIA had a post that Google's search revenue will soon surpass the revenues in the bellweather monopoly windows franchise..Microsoft has to kill Google or reduce their position in the market… Facebook is a pawn..an expensive pawn

  • http://www.loupaglia.com/correlate loupaglia

    John: I'm with you. Once the rationalization occurs that you are spending $41B on an online asset, making the strategic decision to split that asset up on Yahoo! Search and Facebook isn't much of a leap. But that is already saying you justified $246M for 1% and then another justification that $20B is justified for Facebook (expensive pawn or not).

    Couple of points:
    1. It is a very dangerous strategic game to justify getting so heavy into online search simply because Google is making money doing so. Even if it is more money than the windows franchise.
    2. Online search and windows are two different businesses so I'm not clear on why any comparison of the two revenue streams should be made.
    3. Is there a guarantee that you are a immense player in search long-term by placing a $41B bet on yahoo! search and Facebook? Right now, I'd say it isn't a sure thing and it better be at that price tag.
    4. Will Facebook acquisition help with the Office franchise? Because MSFT needs to have a strategy there against Google Apps as well. I'm not sure Facebook is the answer here either.

  • http://furrier.org John Furrier

    I'm with you on the valuation but if Msft was willing to poney up 41 billion to get yahoo they might be willing to grab the yahoo search and facebook for a price in that range.

    Microsoft is crunching the spreadsheets and SIA had a post that Google's search revenue will soon surpass the revenues in the bellweather monopoly windows franchise..Microsoft has to kill Google or reduce their position in the market… Facebook is a pawn..an expensive pawn

  • http://www.loupaglia.com/correlate loupaglia

    John: I'm with you. Once the rationalization occurs that you are spending $41B on an online asset, making the strategic decision to split that asset up on Yahoo! Search and Facebook isn't much of a leap. But that is already saying you justified $246M for 1% and then another justification that $20B is justified for Facebook (expensive pawn or not).

    Couple of points:
    1. It is a very dangerous strategic game to justify getting so heavy into online search simply because Google is making money doing so. Even if it is more money than the windows franchise.
    2. Online search and windows are two different businesses so I'm not clear on why any comparison of the two revenue streams should be made.
    3. Is there a guarantee that you are a immense player in search long-term by placing a $41B bet on yahoo! search and Facebook? Right now, I'd say it isn't a sure thing and it better be at that price tag.
    4. Will Facebook acquisition help with the Office franchise? Because MSFT needs to have a strategy there against Google Apps as well. I'm not sure Facebook is the answer here either.