Venture Capitalist at Theory

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2 minute read / Feb 26, 2013 /

The Relationship Between Margins and Acquisition Prices

Amazon operates its businesses at very close to break-even, zero net margin, to win the greatest share and prevent competition from undercutting them. This is as true for their books business as their infrastructure business, AWS. Bezos has explicitly stated this strategy and it’s the one that has led to Amazon’s massive success in many different lines of business.

Over sushi, a friend explained to me that this strategy might also extend to the way the company views acquisitions. If Amazon’s strategy is to run most of their businesses at break-even including acquisitions, then the value of a profitable and fast-growing startup to Amazon is decidedly less than to a another acquirer who will run a business at greater margin if for no other reason than the startup will spin-off less cash under Amazon’s low-margin strategy.

Many acquirers will pursue attractive larger, revenue generating startups with an aim to keep running the business as is (without changing the economics of the business). Ideally, acquisitions increase the revenue and profitability of the the parent company, increasing stock price and enabling the parent to raise capital more easily in the public markets.

After that speculative conversation about Amazon’s M&A strategy, I’ve been wondering whether, all things being equal, the acquirer who pays the most for a startup is the one willing/capable to run the business at the highest margin. Of course, I’m setting aside all strategic considerations (technology ownership, brand, sales synergies, etc).

What do you think? Message me on twitter with your thoughts

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