You Pays Your Money…

I was reading an article on the Business Insider website this week and it struck me that how you viewed the events the author was talking about would depend very much on your point of view. If you don’t want to hit the link, they’re talking about a CEO who turned down an offer to buy out his company – an Internet start-up video-sharing service – for $100 million USD, only to then see his company’s business taper off, its market value drop, and then get fired by his board. The author is looking at this from a position sympathetic to the CEO, discussing how upsetting these events are to all entrepreneurial business people (all Business Insiders in general, one assumes), and how awful it must be for the CEO in the story to have had all of this happen to him. When I read the story, my immediate reaction was that the CEO had a $100 million offer in hand, gambled on being able to get $365 million instead, and lost, taking most of the stockholders’ equity out in a flash…

Now, one could legitimately point out that a lot of new Internet services have sold for a lot more than the $100 million offer over the past few years – notably the photo-sharing service called Instagram, which is essentially the still-picture equivalent of the video-sharing service in our story. It would certainly be foolish to sell an asset worth in excess of $360 million for only $100 million, and you would probably expect a CEO who low-balled the sale of his company to be punished in some fashion once the news got out. People still talk about the inventors of the original DOS system selling out to Bill Gates for what was actually a quite reasonable price at the time, and just imagine what people would be saying about someone who decided to take a low-ball offer for Google or Facebook before they really took off…

On the other side of the issue, we can also point out – as the Board of Directors in our story seem to have done – that passing up a buyout offer for $100 million is still depriving the stockholders of the company of $100 million, and that taking this offer before the company’s business took its sudden decline and its price plummeted as a result would have been a better strategy. It’s not clear from the story if the CEO had any reason to believe that these things would happen, but he had to have known it was possible for the company’s overnight success to slow down or stall out, and he must also have known that gambling on the value of his company rising and losing would not sit well with the company’s owners. It’s also not clear from the story what ownership position (if any) the CEO had in the company, or if Agency Theory problems even come into this…

One of the key issues in Agency Theory is that while a stockholder can own stock in all of the companies he or she wants to, the CEO can (usually) only be the Chief Executive of one of them. This makes the executive less likely to take risks with the company (such as selling it and hoping you got a good price), but he or she also needs to remember that acting against the interests of the stockholders (such as refusing to see the company for $100 million just before its site traffic drops by 83%) will eventually get you fired – unless your gambles pay off…

What happened to the CEO in this story may be unfortunate, but the truth is he was gambling with other people’s money, and those people became upset with him when he lost most of it. He could have chosen to be more conservative, to counter-offer with a high sale price, or any number of other strategies, but he was in no real position to complain when the results came out. As my late mother was fond of observing: “You pays your money and you takes your chances…”