The genesis of Bebo's management Exodus

From the "Now who would have expected that" dept:

News that many of Bebo's senior managers are departing, following AOL handing over $850m in Cash.. And AOL's management conceded that they may even have overpaid.

All the old deal hands down at the Shark and Ferret were shaking their heads at their Babycham's at the time of the transaction, in fact. Not just that AOL had overpaid, but to give the target management cash up front, is asking for a rapid exodus. (It was called the Miami Factor in dotcom days - a dotcom Exec with a payout was instantly in need of a large yacht and pad in Miami )

It seems that its a given in this space that the acquirer will overpay*, but that shouldn't preclude doing other things such as:

- Paying in part in stock, ie linking part of the value paid to the value it brings to the acquirer
- Ensuring that part of the money is earned as an earn-out. A large amount of these valuations are justified on future growth, so nailing the acquired management's benefits to the growth targets they promised at acquisition (i) motivates them to stay, (ii) motivates them to stay working and (iii) ensures that if you have been sold porky pies, some of it lands up back in their faces

Once upon a time this was called diligent, good M&A practice. Even eBay did this with Skype, which ensured that even though they overpaid, they didn't overpay the whole kit and caboodle. In Bubbles, it is seen as Old Fart Rools.

* Why do they always seem to overpay, I hear you ask. It seems to be endemic when Old Co's buy into New New things, but I'd say it is usually due to a perfect storm of:

- Old Company desperation to Do Something to stave off some other looming problem sees this as an alternative that looks easy (the promise of "shape changing" easy money from rapid growth is always seductive to utility growth businesses)
- Old Company not knowing the space into which they charge - aka desperate dumb money
- Senior Acquirer management buy advice from top strategic consultancies and merchant banks, who are also not that familiar with the space
- Retained merchant banks are incented on transaction fees, not impartial advice, so are inclined to paint the rosiest case to get the deal fees
- (Typically) the BigCo deal team are incented on deal doing, not on having to manage the acquisition afterwards - so the business cases are usually way too overoptimistic. (Smaller companies where management have to buy and then manage are usually far more circumspect)
- If the acquirees are even half sharp, they create a hypefest and a bidding war. If its all over the popular press. you know they've succeeded. Timing here is critical, Bebo did a superb job on and got it right.

And this is the main reason that most M&A deals are value destructive and not value accretive. If you pay too much, and pay up front, it is extremely difficult to make a pig of a deal fly. But as long as the incentives for deal doing are not directly linked to the benefits, it will continue.

Anyway, we wrote a tongue in cheek post about it at the time, which - of course - has turned out to be true.