“I guess the only other fair way to go about this would be that one of us deals with the body situation while the other one of us deal with the Krazy 8 situation. In a scenario like this I don’t suppose it is bad form to just flip a coin. Heads or tails?” – Breaking Bad
Who would have guessed that George Lucas would have his own Lego™?
Some small group of people become wealthy due to savings. Some other small groups of people get wealthy by growing their business slowly over time. Besides being born rich (which is the easiest and surest way to get rich), what do the majority do?
There are good Deals, and there are bad Deals, and I’ve been involved with both kinds. So have you. Anyone who has done a Deal (and, really, that’s everyone – two year olds start bargaining for candy and to stay up late as soon as they can speak) has likewise done good and bad Deals.
Let’s start with bad Deals. One of the worst Deals I ever did was when I traded in my first car at a car dealership. I traded for a pickup that was older than the car. Six years older than the car. Plus I gave them a big wad of cash to do the deal. After that Deal was signed, the store manager played a recorded sound of a bomb dropping and exploding over the store intercom.
I innocently asked why they had played the explosion sound. The car salesman said it was, “just a thing the manager does.” Of course, it was in honor of the horrible Deal I’d just done. I suppose it was fair. Several years earlier I had sold them my used car. After several hours of negotiation, they offered me a pretty good price. I asked, “Do you need to know if there’s anything wrong with it mechanically?”
The salesman said, “Nah. Just the body. They can fix any mechanical problems.”
The car had a cracked engine block. Hint: seeing steam coming out of your tailpipe is never a good sign.
Well, I did ask. Actually, several times. I’m not sure they really liked that Deal . . . I guess I wish I had a little bomb sound that I could have made . . . “oh, no, that’s nothing. Just something I like to do.”
But they got the last laugh with the pickup. A year later it threw a rod (this is very bad) through the engine block and oil pan while I was driving seventy miles per hour. Pretty impressive, actually.
What are some examples of other famous Deals/decisions?
- George Lucas got the merchandise rights for a little film he did called “Star Wars®” for $20,000. I think that one little afterthought deal earned him over a billion dollars – and that’s after taxes. Nerds who live in Mom’s basement can afford a LOT of Boba Fett® figurines, since they can avoid that whole “dating” money sink.
- Bill Gates bought DOS® for $50,000. It formed the basis of MicroSoft™. It became really valuable because IBM® said, “Who wants to own software, am I right, Brandon? The money is in the hardware. Let’s go get some martinis, cigarettes and blow dry our feathered hair, maybe play some Pac-Man™.” Or whatever IBM© dudes said at lunch when Reagan was president.
- Peter Thiel bought 10% of Facebook® for $500,000. He now only owns 2-3% of Facebook© due to dilution and share sales. Don’t cry, he can still afford to buy lunch out once a week.
- The Internet Bubble was probably the greatest mass insanity since the Dutch sold tulip bulbs for the price of a house (yes, this really happened, and I’ll talk about it in a post somewhere during the next week or two). I had a friend who got caught up in a website during the Bubble. He ended up selling a company (he owned about 20% of it) to Alta-Vista©. Who? Alta-Vista™! They were the Google™ before Google®. How much did they sell the company for? Fifty Million Dollars. Immediately, my friend was worth Ten Million Dollars. Unfortunately it was in Alta-Vista stock, which, by agreement he couldn’t sell for six months. Six months later? His Ten Million in stock was worth Two Million. He got out, but he was a 36 year old with $2,000,000, which I guess is a pretty cool consolation prize. Why did Alta-Vista™ want his company? It had huge growth – heck, it made $2,000 a month!
- AOL®-Time™ Warner©. Investors lost $8 billion on this merger. Who could have predicted that dial up internet wasn’t the wave of the future?
- Invading Russia or Afghanistan. Repeat after me: no land wars in Asia. Oh, we’re involved in two of them right now? Yikes!
- Nathan Rothschild had early information on the result of the Battle of Waterloo where Wellington defeated Napoleon in “Friday the Thirteenth Part 4: Napoleon Strikes Back.” Even from the Rothschild archives we find: “I am informed by Commissary White you have done well by the early information which you had of the victory gained at Waterloo.” So, knowing the outcome of the battle, it seems certain that Rothschild made some money as the markets were agitated with the uncertainty of the war. How much did Rothschild make that day? History does not record, but Rothschild built a fortune that is estimated at $450 billion dollars in today’s money. That’s five Mark Zuckerbergs. Nathan didn’t make many bad Deals . . . .
What characterizes a Bad Deal?
- Missing information: When I made my stupid truck deal, I had no idea how to get car value information. This was pre-Internet. Mismatched information leads to one-sided Deals.
- Failure to understand potential: Star Wars® merchandise might have been a few posters and t-shirts. Biggest movie merchandising Deal ever. This is similar to what Bill Gates saw. He figured that DOS® was worth much more than the owner did, and used it to leverage into everything MicroSoft™.
- Taking advantage of circumstances. Thiel originally lent money to Facebook® that they needed badly. He ended up with the 10% equity stake in the company. Nice timing, good Deal.
- Stoned-Level Euphoria: The Internet Bubble was characterized by wisdom of a mob all high on PEZ® and thinking that a website that was clearing $2,000 a month was worth $50,000,000. Like toddlers with checkbooks making Deals. Trade a Bugatti® for Cadbury Cream Eggs®?
- Invading Russia or Afghanistan just shows that you have no ability to learn from either history or The Princess Bride®.
- Rothschild bet on bad Deals made in a hurry under pressing circumstances. Never make a Deal under pressure, unless you have to. Really have to.
Nature of the Deal
I’ve seen company take long, agonizing looks at acquisitions and mergers that amounted to far less than 1% of the company’s value. I’ve also heard that Warren Buffett has bought many a company on a one page contract. He says his lawyers make them longer now, but the Deals that made him rich (well, richer) could be written on a single page. And nobody argues that Buffett does bad Deals.
But are there really Win-Win Deals?
Whenever I hear “win-win” I think of those zombie adult over-enthusiastic motivational speakers. You know the ones I mean – the ones that are always insufferably happy? Them. They talk about win-win. But win-win deals can be real, and here’s an example:
I was working at a multi-billion dollar company when a multi-billionaire decided he wanted to buy it. He offered 30% above the current stock price, which was six times what I had gotten my shares for. I took his offer (for my shares, not the company) in a second. The billionaire then structured his payments from the profits so that his original purchase was paid off in about three years. Plus he still owns the company.
So, I got more money out of the stock than I ever expected, the billionaire got more billions, and he still employs thousands of people daily to make products that millions of people use.
That’s a win-win-win-win. Yay capitalism!
What was my personal best Deal?
When taking a job at a company, I requested as part of my offer that if they ever asked me to move, they’d pay me at least what I’d paid for my house. Since house prices always go up, this was an easy calculation for the company, right? Sure! They agreed, and I said, “yes.”
Eleven months later when they asked me to move, the housing bust was in full swing. Thankfully, they cut me a check for the difference between the appraised value of the house versus my original purchase price. Had I not asked for that simple clause, I would have been out $45,000. The upside? The company also paid the mortgage, insurance, and property taxes until the house sold, a year and a half later.
Don’t feel bad for the company . . . they still got the better end of the deal.
They got me!