Tails I Win, Part II

chrissssss_will wrote a column · Oct 21, 2021 22:16

Links to previous parts:
Heads I Win, Tails I Win (Part I)
Heads I Win, Part II

At this point, per the data above, you might be very keen to see $PayPal (PYPL.US)$ buying $Pinterest (PINS.US)$. I am certainly not against it, knowing what I know. PINS users are rather fanatical, and I could see great synergy. It almost reminds me of how PYPL and $eBay (EBAY.US)$ were once under one roof. But, I think PINS is far superior in this day and age. That is, PYPL is better off with PINS than EBAY at this point in time - I have no doubt about that in my mind.

I should also mention that the price is better now than when $Microsoft (MSFT.US)$ was considering a deal:

Price tag-wise, Pinterest's stock is off roughly 30% from its all-time high in February as the platform has been losing users-a discount from when reports swirled that Microsoft was looking into buying the firm at around $51 billion early this year.

Even if the deal falls through, I still see the conversations as being productive, and I still see some partnership activity increasing in the future. You don't need to be married to dance at the party.

Furthermore, I don't like big deals, but I do like intelligent conversations. Put another way, PYPL is looking to spend $45 billion for PINS. That's huge. And it's messy:

Barclays' El-Assal commented that a deal for Pinterest would be the biggest one that PayPal has attempted in its history and "would necessitate a different mix of funding than just cash on hand, as has been the case for previous acquisitions."

And...

It would be the biggest acquisition of a social media company, surpassing Microsoft Corp's $26.2 billion purchase of LinkedIn in 2016.

They can't just buy it with cash. This isn't a simple "bolt on" for PYPL. And, if it fails, quite honestly, I'll cheer a little because the research is against big M&A. According to the Harvard Business Review:

...study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.

Wrap-Up

I hope a few things are clear. First, I'm bullish on PYPL and I'm happy to be buying at prices around $250. I'm even willing to buy up to $275, but I'll take a lower price, of course. (Thank you for any discount.)

Second, I do see how PINS could be a great purchase for PYPL. It fits their mission for user growth, and general business growth. The revenue and user monetization opportunity is intriguing, if not excellent. Furthermore, the user base itself likes to shop and buy, which is perfect for PYPL.

Third, if the deal does not go through, then I won't be shocked, and I won't be sad. The price for PINS seems about right, and it might even be at a slight discount - especially in its potential long-term value to PYPL. But, if talks fail, it won't cause me to skip a beat, or lose faith in PYPL whatsoever. And, in fact, I might even feel relief. Again, Godzilla-size M&A doesn't have a great record.

And, finally, the biggest risk that I see is quite simple. Namely, that PYPL decides to raise the offer price, higher and higher. Right now, the price is acceptable as a PYPL shareholder. But, if the price tag keeps going up, for whatever reason, then I'll be much less enthusiastic. In fact, if the offer price goes up too much, I might have to revise my entire PYPL thesis. Poor capital allocation is deadly. I want a great deal, or no deal. We'll see how it plays out.

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