When companies vastly overpay for acquisitions

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I can think of two scenarios: one is acquisition is done via cash; another one is done by stocks (and the stock itself is overvalued).

The yardstick of overpayment


EBITA or EBITDA (or use Charlie Munger’s word, replace it with bullshit)

I know from my own software industry experience, 10x sales (or revenue) is usually a fair price.


Francisco Partners Completes Acquisition of Sumo Logic: Pursuant to the terms of the definitive agreement announced on February 9, 2023, Francisco Partners has acquired all outstanding shares of Sumo Logic common stock for $12.05 per share in cash, valuing the company at an aggregate equity valuation of approximately $1.7 billion.


Sumo Logic’s peak revenue was $300.7M in 2022. The peak quarterly revenue was $79.8M in 2022(q4). Sumo Logic’s revenue increased from $155.1m in 2019 to $300.7M currently. That’s a 93.91% change in annual revenue.

If my memory is correct, they were losing a lot of money too.

Note each industry has its own metrics (or yardsticks).

In the below example, I assume Square and AfterPay is in the fintech space, and Disney is in the content creation (movie and animations to be specific), and park/entertainment business.

Two Examples

Scenario 1: Disney buying 21st Century Fox, US $71.3 billion

Scenario 2: Square Inc (now Block) bought AfterPay for $29 billion

(Reuters) The $29 billion deal in 11 weeks: how Square bought Afterpay

(paymentgenes) The Real Reason Why Square is Acquiring Afterpay

Both scenarios didn’t play out well. Both acquirers’ stocks ($DIS; $SQ) were down since the acquisitions. Btw, I googled those two deals’ closing date.

For Block (Square Inc., I used 02/01/2022 per this source, noted another source too)

I think, maybe we should track the performance between the day before deal was announced until now.


Consolidation in the Production Monitoring software space

In addition to Sumo Logic, we have

New Relic (by Francisco Partners and TPG for $6.5 billion) –

Revenue in 2023 (TTM): $0.96 B
According to New Relic ‘s latest financial reports the company’s current revenue (TTM) is $0.96 B. In 2022 the company made a revenue of $0.88 B an increase over the years 2021 revenue that were of $0.75 B.The revenue is the total amount of income that a company generates by the sale of goods or services. Unlike with the earnings no expenses are subtracted.

Splunk (Cisco): this is after Cisco Completes Acquisition of AppDynamics (2017)

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