Last November, the Boston Red Sox paid just over $50 million for the right to negotiate with Japanese pitcher Daisuke Matsuzaka. It was an extraordinary amount of money – particularly given that the club would still have to sign him – but the deal made sense for both financial and strategic reasons: (F) The Red Sox had plenty of cash on hand, while Matsuzaka would help tap new revenue streams in Japan; (S) Matsuzaka would be winning games for the Red Sox, rather than for the rival New York Yankees (which bid $32 million).
Less than two weeks later, the Red Sox announced that they had signed right-fielder J.D. Drew for $70 million over five years. Some people considered the contract to be a quid pro quo (Drew’s agent also repped Matsuzaka), and most considered it to be a top-decile payment for a top-quartile player. But there was something that everyone agreed on: The Red Sox were a team that would pay to win. More importantly, it was a team that would risk overpaying.
All of this brings us analogously to Microsoft, which last week agreed to pay $240 million for a 1.6% stake in social networking juggernaut Facebook (an aside: remember when it was named TheFacebook?). Like with the Red Sox’s Matsuzaka signing, the Facebook deal made sense for both financial and strategic reasons: (F) Microsoft is rich, and the deal will provide it with all sorts of new revenue opportunities; (S) It keeps partial Facebook ownership away from rival Google, which also wanted a piece.
But this transaction did not occur in a vacuum. It came just months after Microsoft paid for aQuantive for $6 billion, or more than 13X earnings, and days after CEO Steve Ballmer said that the company would make around 20 acquisitions per year for the next five years. The result will be that each of those 100 acquisition targets will expect a step above top-dollar from Microsoft. As one company insider told me: “Bankers would be naïve not to.”
This is a tough position from which to negotiate, which is why Microsoft needs the Facebook and aQuantive deals work on their own merits. If they don’t, it will likely be stuck with a lot more overpriced baggage down the road. If they do, well… then Microsoft will be popping champagne corks. Kind of like the Red Sox.