Theoretical Irresponsibility

I am about to share with you a revolutionary economic theory of mine. After in-depth analysis and careful testing, I think, with a large degree of theoretical certainty that I can point out the common factor uniting various past giant deals in the high-tech industry. Deals, which have been analyzed countless times, and which we all viewed with wondrous eyes.

So, what do Lucent purchasing Chromatis for 4.5 billion dollars, eBay purchasing Skype for 2.6 billion dollars and Google picking YouTube for 1.6 billion dollars and many more Mega deals have in common? Correct, in all of them a small company, lacking any real income (if any) was acquired by a giant public company. That is nothing new. Yes, it is also true that these transactions have not proved themselves worthy, not in terms of income contributions, not in building shareholder value, and not in the strategic aspect.

But, here is the innovation, my theory. The common factor of these deals and others like them is the irresponsibility factor. Irresponsibility, not only in terms of the hasty decision that drove the purchases, but also in the accountability perspective: When the enormity of the mistake was discovered, nobody took upon themselves any personal responsibility. As far as we know, nobody at Lucent was fired because of the colossal mistake of purchasing Chromatis, nobody was moved aside because of the ridiculous price eBay paid for Skype, nobody at Google will be punished for the insane valuation the internet princes agreed to give a video storage site named YouTube.

And by the way, nobody will pay with their head for the illogical valuation used by Microsoft to purchase a mere percentage of holdings in Facebook. The same Microsoft, which was willing to pay 45 billion dollars for Yahoo, a company with sales of about 7 billion dollars in 2007 which controlled then 23% of the search engine market, is the one that evaluated Facebook at a third of the value of Yahoo. Facebook, with 60 million users but relatively minute income, with a long way still ahead of it before proving real financial value.

And why, you may ask, did I call my theory “the theory of irresponsibility”? The answer is very simple. It is because only irresponsible people make such decisions. I do not intend to insult those involved, who sat and seriously discussed market valuations, multipliers, future additional shareholder value and so on and so forth. I have no doubt that the honorable bus-dev team members, the valued dealmakers, faithfully did their job. But it is totally obvious to me that they knew that nobody would come after them with complaints two or three years later, when the enormity of the mistake would become clear. Nobody will look for those at fault and of course nobody will be called upon to assume any personal responsibility.

And this is where we should add an anecdote that in itself is interesting. It is called OPM, “Other People’s Money”. The additional common factor of the above transactions, is that the ridiculous prices were always paid for with other people’s money, or more exactly - public currency, or public shares.

In spite of the fact that the USA has such strict regulations on public companies, they have not yet found the way to ensure that people assume personal responsibility for their decisions, especially when they dip their hands into public money to finance such decisions. I would be curious to hear what those who estimated the value of Chromatis would answer to the questions of a stern SEC investigator about the purchase and the downfall which followed: “We loved the technology”? “We felt like doing something interesting for a change”? “We wanted to be remembered as the most ridiculous acquirers of all times”?

And now, pay attention please. Until my revolutionary theory is adopted, and until it is recognized in the appropriate circles, we will all keep on partying. The venture capital investors amongst us will keep on investing, at times, in companies without a clear business model, knowing that irresponsible buyers are still waiting for us out there. The entrepreneurs amongst us will keep on building, at times, companies without any real business model, knowing that a tiny percentage of them will be bought one day for an imaginary valuation, for which none of our buyers will ever be held accountable. That’s what I would call real irresponsibility.
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(Published by "Globes" - 17 February 2008)