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Should You Call An Acquisition an Exit?

Wednesday, March 29, 2017 6:33
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The prediction is that acquisitions are going to increase in frequency and volume.  Big corporates are hungry for new innovation and they are going to buy it.  Their balance sheets are healthy.  If the tax overhaul that is being promised doesn’t fail, corporates should have lower taxes and become more acquisitive.  Drops in corporate tax rates change the internal hurdle rates companies put on acquisitions.    A lot of cash could get repatriated from overseas as well further increasing the ardor of corporations.

My question pertains to semantics, framing, and impressions.

When you invest in a company and it gets acquired, the first instinct of people is to assume that you made money. Otherwise, why would you as an investor acquiesce to letting a company get bought?  In some acquisitions, investors do make money.  In some, they don’t lose but they don’t make a lot either.  Acquihire can bring an investor profits if there wasn’t a lot invested in the company in the first place.  It’s sort of like a quick scalp on a small trade.

Personally, I am okay being honest and telling people I lost money.  It’s going to happen more often than not and it is part of the game.

Some acquisitions are just for stock, and no cash exchanges hands.  Sometimes one startup buys another startup and everyone is still along for the ride.  The investor trades one set of risk parameters for another.  Sometimes, there are earn-outs tied to the purchase.  If a company doesn’t hit the numbers, then investors don’t get anything.

When you had to manage a loser trading, a lot of times you spread it off.  If you are an investor and swap one startup stock for another startup stock, it feels like spreading it off.  Of course, you have a lot less control and there is no rip cord.

What should an investor call a company they invested in that gets purchased but is still a loser or it’s break-even?  Should we create a new designation?  Maybe call it “absorbed”?

I just feel like the words “acquisition” or “exit” implies something positive happened when it is entirely probable something negative happened.  What do you think?


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