I've been sitting on this all week thinking that someone is going to write about the structure of the latest Google acquisition. So far the deal has generated 178 articles by mainstream press, 578 blog posts and 1.18 million search results. Now I haven't read them all, but I have yet to see anyone mention:
- Total cash consideration $1.238 billion? What's with the 1.238? Why not just 1.2 or even 1.25 but 1.238? And how about $102 million in up-front cash? What kind of negotiations end at 102? If they were using stock as consideration it would make sense, but it was an all cash deal.
- 92% of the total consideration, over a billion dollars, in the form of an earn-out. I never do earn-outs, and I have yet to see one work for the seller. But therein lies the problem, they almost always result in litigation. I've never seen an earn-out this big in terms of percentage. This isn't a billion dollar lottery ticket for the shareholders of dMarc, it's a billion dollar lawsuit hanging over Google's head every time they want to change strategy or direction.
- But wait you say, isn't Google being really smart by not over-paying and linking future consideration to actual success? Well not if you read the last line of the press release which says, Substantially all of the payments [upfront and contingent] will be accounted for as part of the purchase price for the transaction. This wont have a big impact on Google's financial statements now, but if the acquisition doesn't work it could mean a billion dollar asset impairment in the future. Granted they wont loose a billion in cash, but a big write-off could negatively impact the stock price. This is another good reason not to do earn-outs, they're too hard to account for under GAAP.
I wish them the best of luck, and I hope it works out for both sides.
This is the first in a series called Deal Lab where we will break-down interesting structures and characteristics of recently announced acquisitions.