Paying a Premium

I'm not quite sure what got me thinking about this subject today, but it's one that has always fascinated me. Warren Buffett believes (as does my former boss Nicholas Brady) that wealth is made in finding value, but few heed that suggestion and there are many cases in which we are willing to pay a premium for an asset (or company, as the case may be).

Take in to account the Yahoo acquisition of Oddpost for almost $30 million to get a leg up in the webmail wars, or the $775 million LexisNexis paid for Seisint to bolster its presence in the billion dollar risk management industry. I have no idea what valuation metrics were given to the Yahoo-Oddpost transaction, but at 10 employees and with some angel capital in the bank, I cannot imagine it was a normal multiple of anything. In the case of LexisNexis-Seisint, the company was valued at a little more than 7x current/estimated revenues, not exactly cheap by any standards.

So, I pose the question: "When is it OK to pay a premium?" We've seen that in the world of search or portals, first to market isn't worth all that much, well, with Google coming out to play late in the game. Above and beyond the complexity of timing, I'd venture that there are 3 factors that can impact the premium payment of a company:
  • A Strong & Defensible Brand
  • An Industry Defined by Exponential Growth
  • A Truly Innovative Recipe or Protected/Patented Product

Any combination of these factors can elicit a premium, however what that premium might be is only really known to the buyer. To think otherwise is foolish and to think that you can build a company on these features alone without strong business fundamentals is also foolish -- a relic of last century!

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