M&A, Valuations and Long-Term Building
It’s difficult for management teams to get excited about M&A prospects when valuations are sky high as they have been since the second half of 2020.
Every company believes they are worth 20x revenue (public and private companies), when long-term history tells us that 20x earnings - forget revenue - is expensive.
Nonetheless, if you have the good fortune as CEO to where your company is trading at 50x-100x Revenue, understand that these valuations won’t last forever. Use your inflated currency to acquire companies with complementary products and services, a similar operating culture, and healthy cash flow, especially if your company is not generating cash.
The problem is most CEOs are only in the chair for 3-5 years, so they do not think long-term and make selfish, short-term decisions such as buying back stock rather than investing in long-in-the-tooth technology products and services. It is more important to them to bolster the value of their stock options than to build best-in-class products. If a Software company is running a legitimate 40% operating margin, you’ve got to ask yourself what are their priorities - maximizing margins in order to pump the stock, or, building the best long-term company possible with the best products and best people?
When may the market implode? I’m not smart enough to predict “when”, I simply know that no fiat currency in world history has survived persistent deficit spending. The Dollar has suffered great damage over the past five years and will continue to suffer significant losses in purchasing power so long as the U.S. runs $2 Trillion deficits each year.
I can tell you what the first sign post will be. The 10-year will suffer a broken auction whereby the Fed will have to purchase a sizeable chunk of the issue. The reason Treasury did not sell more long-term debt over the past five years is because there is not sufficient demand for 10, 20 and 30-year Treasuries. No smart country wants our crap paper. China has dumped Treasuries in exchange for gold. I suspect that Japan is doing the same, we will know more in January 2026 when Treasury reports official sovereign Treasury holdings.
If I am Google (GOOGL), Amazon (AMZN), Microsoft (MSFT), Meta (META), Alibaba (BABA), or Oracle (ORCL) to name a few, I am investing heavily in people and technology, including acquired technology. Allowing cash to sit on the sidelines in this inflationary environment is a fool’s pursuit. That does not mean I am unloading the balance sheet on building data centers. My view is that data center configuration will experience radical changes over the next 10-20 years as chip technology evolves.
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