Microsoft are the worst investors in the world.
The news wires today have announced that Microsoft has written off $6.2 billion mostly related to its 2007 aQuantive Inc. acquisition.
Microsoft paid $6.3 billion in 2007 for Aquantive that Microsoft valued five years later at $0.1 billion due to the $6.2 billion write off.
Let’s see how not to invest in companies.
How Much Was Aquantive Worth When Microsoft Bought It?
The last quarterly report for aQuantive before the acquisition from the SEC website up to 30 June 2007 shows the following for the balance sheet:
- $995 million in total assets
- $348 million in total liabilities
- $276 million in goodwill and
- $45 million in other intangible assets.
If we take away goodwill, intangibles and total liabilities from total assets we are left with $324 million.
For a quick tutorial as to why this method is used to value companies, click here.
$324 millions or $0.3 billion minus $6.3 billion (the price Microsoft paid for Aquantive) means that Microsoft overpaid for Aquantive to the tune of $6 billion at the time of the acquisition.
Now, correct me if I’m wrong on the maths but this is a gargantuan overpayment by Microsoft for a company that did not realise its full potential over five years.
The moral of this story is: if you overpay for your investments in companies, your expectation should be to lose money.
Investing Best Practice
Not every company that I purchase shares in makes me money but at least when I purchase shares in them at or below their book value, I have some protection from them losing me money since I have bought them either at the full book value (at their full value) or below their book value (below their full value).
If I also by a diversified group of shares – companies in different industries – selling at or below their book value, this also protects me from losing money because if one industry is going through a bad patch, my entire group of shares will not be affected, only a small number of them.
Before you click that buy button, make sure you are not overpaying for your shares like Microsoft and use a sensible valuation method.
Thank you for reading the Shares and Stock Markets Blog and good luck with all of your investments.