Splashy Cashy: Deep Stack M&A in Silicon Valley

[ Disclaimer: This piece is pure speculation on my part, with just a little input from folks who voted on and responded to this tweet storm. I obviously haven’t spoken to the founders of any of these companies, nor would they tell me if they were considering selling (obviously). ]

If you’ve ever played poker you know that a player’s ‘stack size’ — the value of the chips they have in front of them — can deeply impact their behavior in a hand.

[ Click to Tweet (can edit before sending): http://ctt.ec/0Z7xR ]

When playing poker at the $1-$2 game, where the bet sizes are very small, you’re going to play differently depending on if you have $5,000 or $50 in front of you.

Every hand matters when you’re short stacked, but very few hands are material when you’re deep stacked, as you have the luxury of playing a lot of hands or waiting on the sidelines.

Tech companies that are wildly deep-stacked right now:

1. Apple $200b+ in cash/equivalents, $593B valuation
2. Google $75b+ in cash/equivalents, $551B valuation
3. Amazon $16b+ in cash/equivalents, $366B valuation
4. Facebook $23b+ in cash/equivalents, $362B valuation
5. Microsoft $105b+ in cash/equivalents, $457B valuation
6. Cisco $60b+ in cash/equivalents, $157B valuation

Those six companies have $470b+ in cash/equivalents and $2.5t in market cap.

Zuckerberg has been the master of acquisitions in the past couple of years, having the audacity to pay $22b for WhatsApp and $2b for a *pre-customer* Oculus. Think about that for a moment. Zuck paid $2b for a company without a market, and that may take a decade to have 100m users — if that ever happens!

And look what just happened. Unilever, GM and Walmart just sat down at the big game and shot the locks off their wallets:

1. Unilever bought Dollar Shave Club for $1b
2. GM bought Cruise for a rumored $1b+
3. Walmart is buying Jet.com for $3b
4. Verizon is buying Yahoo for $4.83b

… and let’s not forget that Bob Iger is absolutely the greatest acquirer in the business, with Disney buying Star Wars, Marvel & Pixar for a paltry $15.45b — combined! He also bought MAKER, which was probably worth the $500m for the education.

Who’s Next?

In looking at the market, I made two lists: the most desirable companies for the deep stack players to own, as well as the startups that I hear (publicly and privately) are most likely to sell over the next two years.

A smart person told me one time, “great companies are bought, bad companies are sold.”

The Six Most desirable companies for big stack players to buy, but who are not likely to sell:

1. Netflix ($42b market cap, ~$8b in 2016 revenue)
$8b in subscription revenue, a growing library of quality IP & international ambitions make Netflix a no-brainer for Apple, Amazon and Google. Given Disney sells into Netflix, and they own the best IP in the world, it doesn’t make much sense for them to overpay.

2. Uber ($68b valuation)
As an Uber shareholder I shouldn’t — and wouldn’t — speculate, but according to my Twitter poll y’all thought that Google should buy them (27%).

3. Tesla ($33b market cap, ~$4.8b in 2016 revenue)
I speculated back in February 2015 that Apple should grab Tesla for a host of reasons. That being said, I think Apple might have missed their window, with Tesla getting “escape velocity” with the pre-sale of 375,000+ Model 3 cars.
Who should buy: Apple, Google.

4. Snapchat ($22b valuation, rumored ~$300m in 2016 revenue)
Facebook is the logical buyer for Snapchat, but that’s not going to happen — ever. Facebook tried to buy Snapchat back in 2013, and when they couldn’t, Zuck tried to kill Snapchat with a pathetic knockoff called “Poke.” His PR team made a big deal about how involved Zuck was in this completely embarrassing knock-off, which candidly felt beneath someone with Zuck’s level of success.
Of course, Mark has gotten his revenge by getting the killer team at Instagram to launch a blatant ripoff of Evan Spiegel’s brilliant “stories format,” in what I think could be legally actionable (I don’t know SC’s patents and trademarks, but making a pixel-by-pixel knockoff with the same exact *name* feels actionable).
Who should buy: Facebook, Google.

5. Airbnb ($30b valuation)
Given Airbnb’s massive valuation, which is greater than Wyndham ($7.69b), Marriott ($18.58b), Starwood ($13.35b) and Hilton ($23.95b), it’s unlikely to find a buyer in the hospitality space. Like Uber, Airbnb has a created a new market, which means there isn’t a natural “buyer.” Not having a natural buyer, like social networks have in Facebook and ad-based businesses have with Google, makes companies like Facebook, Google, Uber and Airbnb less likely to sell (they simply get fewer offers).
Who should buy: Amazon, Google, EBAY (more likely a merger).

6. Slack ($3.8B valuation, rumored >$60m in 2016 revenue)
No enterprise software company has ever grown as fast as Slack, which has a deceptively powerful network effect that makes it hard to displace: API integrations. Once a company gets the Slack bug, they start piping all kinds of data from around their organization into chat rooms. Ripping out that plumbing and rebuilding it in a competitor, from say Google or Microsoft, wouldn’t be impossible, but it wouldn’t be easy.
Who should buy: Google, Microsoft, Facebook.

Probably looking, or at least willing, to be sold:

1. Jawbone: Hardware is hard and Jawbone’s innovations have been copied long ago. Perhaps Amazon could make Jawbone their house brand (think, a better AmazonBasics), or Google could absorb them into their phone and watch teams.

2. Instacart: Amazon has probably figured this business out better than Instacart, so that leaves a buyer like Whole Foods, Alibaba, FedEx, UPS or someone looking to solve the last mile.

3. Twitter: Going sideways in a time of explosive growth with a half-time CEO is no way to live. Twitter should have been sold by now, which leaves one to wonder why it hasn’t been snapped up.

4. Zenefits: The massive clean up project David Sacks took on seems to be reaching an end game that would realistically value the company at $2b. At that level a company like Intuit or ADP would be crazy to not pick it up. [ Note: I’m an LP in a Fund that has a small stake in Zenefits. It’s not material, but I always like to disclose. ]

5. Dropbox: Apple tried to buy them when their cloud efforts were a mess. I’m sure Microsoft and Google kicked the tires as well, but they too have robust cloud products that, well, work just as good. This former high-flyer is less strategic now than it was, so it’s gonna need to sell on the quality of its revenue — not plugging a hole for a buyer.

Anyway, I’m going to talk about all this on CNBC tomorrow at 8:20AM (Pacific), so I thought I would get my thoughts together in an essay, which I haven’t been doing since going on paternity leave. [ UPDATE: 8/9. You can see my CNBC appearance here. ]

Yeah, we had identical twin girls four months ago — mom and babies are amazing and I’m back at work (on the book, podcast, TV show and incubator).

Best, @jason

PS – We filmed two interesting podcasts for founders called “Jam Sessions” during which seven different speakers shared the following strategies for how to grow your business:

1. Melody McCloskey, StyleSeat: Leveraging data to drive growth and engagement.

2. David Temple, Hello Scout: Thinking beyond digital and using offline acquisition to create trust.

3. Edgar Blazona, BenchMade Modern: Micro-conversions to a big ticket sale and optimizing paid acquisition.

4. Jill Bourque, RushTix: Net Promoter Score and the difference among promoters, passives, and detractors.

5. David Hassell, 15Five: Why customer success is a top priority in his company.

6. Craig Zingerline, Votion: Customer-driven development and prioritizing items based on feedback.

7. Mei Siauw, LeadIQ: How to increase customer satisfaction and three simple rules for anyone in her company who faces customers.

Episode 662 – http://thisweekinstartups.com/jam-session-styleseat-benchmade-scout/

Episode 650 – http://thisweekinstartups.com/jam-session-customer-management/

PPS – We’ve launched two new newsletters at Inside.com:

1. Inside VR & AR: vr.inside.com
2. Inside Security: security.inside.com

PPPS – our SCALE event is November 14th & 15th here in San Francisco. Buy a ticket at launchscale.net and suggest a speaker here: launchscale.net/speakers