The Old Joel on Software Forum: Part 4 (of 5)

A dot com retrospect

SMART Modular, an electronics assembly firm founded in 1989 by Ajay Shah (Non-Resident Indian) and his wife Lata Krishnan (now the president of America India Foundation) was sold to a $11 billion Silicon Valley based giant Solectron for a $2 billion dollar purchase consideration. The revenue of the company (target) was less than $1 billion dollars, which implies a Net Worth of less than a billion and a Goodwill (in the sale) of over $1 billion dollars.

Today, Selectron is selling back SMART Modular to Ajay Shah and his wife Lata Krishnan for a paltry $100 million dollars (1/5 of the cost in less than 5 years, what's the ROR).

Sathyaish Chakravarthy
Tuesday, February 17, 2004

I'm sure there are lots of examples of this.

I currently work for an American-based company that IPO'ed in the early 1990's, and was taken over by a larger company for really silly money during the boom.

Of course the larger company dot-bombed, leaving the founders of the smaller company to buy it back for a fraction of what it sold for.

I don't want to be any more specific as we're currently planning another IPO, and there are SEC rules about that sort of thing. Hopefully I'll be around when the silly money comes along again :)

MugsGame
Tuesday, February 17, 2004

This kind of stuff has been going on forever -- long before the great dotcom ripoff.

Novell bought Wordperfect Corp for $800 million and 2 years
later sold it to Corel for $200 million.

Joe on Software
Tuesday, February 17, 2004

<TYPO>
(1/5 of the cost in less than 5 years, what's the ROR)
</TYPO>

I am getting over confident somehow.

Purchase Consideration: $2 billion
Buyback: $100 million

(1/20th of the cost in less than 5 years)

Sathyaish Chakravarthy
Tuesday, February 17, 2004

"for a $2 billion dollar purchase consideration...the revenue of the company (target) was less than $1 billion dollars"

Did you mean profit, or revenue? It's a very common valuation tactic to do a small multiple of anticipated annual profit. I wouldn't consider 2x annual profit to be at all out of line for a purchase price.

Brad Wilson (dotnetguy.techieswithcats.com)
Tuesday, February 17, 2004

"You should buy my latest book - 'How to turn a million dollars in real estate into ten thousand dollars in cash'"

-Steve Martin, ca. 1979

Philo
Tuesday, February 17, 2004

>Did you mean profit, or revenue? It's a very common valuation tactic to do a small multiple of anticipated annual profit. I wouldn't consider 2x annual profit to be at all out of line for a purchase price.

Yeah, I meant the revenue, the gross turnover, was a shade less than a billion dollars. I find the valuation wierd because the goodwill in a capital transaction is valued commonly as a number of years' purchase of the Super Profits (Average Profit - Normal Profit in the industry based on the Industry ROI).

Imagine, even a very optimistic bet, the NP ratio of the firm to be anywhere in between 0-20%. Now consider the purchase consideration in the light of a 20% NP (which is a very very very optimistic estimate).

Sathyaish Chakravarthy
Wednesday, February 18, 2004