Do Big-Money Acquisitions Mean We're In a Tech Bubble?

Nerval's Lobster writes "When a major IT company pays a reported $30 million—roughly 90 percent of it in cash—for an iOS app with no monetization strategy and a million downloads since launch, is that a sign that the tech industry as a whole is riding a massive, overinflated bubble? Yahoo isn't alone, by a long shot: over the past couple years, a few apps have been snatched up for enormous sums—think Facebook's $1 billion acquisition of Instagram in 2012, or Google buying Sparrow for a reported $25 million. Nor has the money train stopped there: in a pattern that recalls the late-90s market frothiness for anyone over the age of 28, a handful of tech companies have either launched much-hyped IPOs or witnessed their share price skyrocket into the stratosphere. But does all this IPO activity and app-acquiring actually mean 'bubble'?"

Comments

yay for bubbles

[iggymanz]

get it while the gettins' good, save the money - don't blow it, then get out

rinse and repeat, pt barnum was right

Re:yay for bubbles

[SternisheFan]

get it while the gettins' good, save the money - don't blow it, then get out

rinse and repeat, pt barnum was right

Offtopic: P.T. Barnum never did say, "There's a sucker born every minute.", his competitor did. Here's a link to what really went down then...

http://www.historybuff.com/library/refbarnum.html

Re:yay for bubbles

[lightknight]

Indeed. Looking at the college loan bubble...as well as the new real estate / mortgage bubble...I am without words. We just went through this not even a decade ago, so...why are we doing this again?

As for the 'tech' bubble...these are purely fluff acquisitions...good money paid for crap...that makes the original DOTCOM bubble look rock solid in comparison. I don't have the figures in front of me, but I've read some of this stuff recently...we're looking at paying premiums for companies in excess of their earnings for the next 50 years...many of them aren't even paying a dividend, so the only money that can be made is by selling it off to someone else who thinks it will go higher...or possibly someone who needs to claim a fictitious loss through some mystic means. Like Instagram, a number of these companies don't even seem to have anything resembling new technology.

From what I've seen, the heart wood of the tech sector has given out, and it appears to be shrinking. We're seeing a compacting of the tech sector, not new energy.

An easier way to chart things is to ask the tech sector "have your wages risen greatly, on average, in the past three years, allowing for inflation?" Find out which sector is seeing a rise in wages, either regional or global, and you'll know which one is currently enjoying a boom. Last I checked, which was a while ago, the Australian mining companies were doing pretty well here.

Re:yay for bubbles

[jxander]

The 90s dotcom bubble was run by nerds, with tons of big ideas for what the Internet should be, but little business sense, and even less long-term work ethic. They were given boat-loads of cash, with little to no strategy for long-term success. The really good ideas stuck around (see Google, Amazon, eBay) while most fell by the wayside.

The current bubble seems more like an intentional inflation, trying to catch the same lightning-in-a-bottle. Except this time it's being run by more business minds, less nerds. People who were perhaps old enough in the late 80s to grasp Gordon Gecko's "Greed is good" mantra, but not old enough in the 90s to catch the dotcom wave. They want to recreate that magic and just pocket all the free money. Thus your observation that the "heartwood has given out." There are no eBays or Amazons this generation, just faux-photo filters and Pissed-off Poultry.

Yes

[Anonymous Coward]

I live in the San Francisco bay area and the general vibe in this area is very reminiscent of how it was during the dot-com bubble of the late 90s. Lots of easy money is being thrown around, there's a housing shortage and rents are sky high, and my phone is ringing off the hook with requests for job interviews and I'm not even on job boards anymore.

Yes, it's inflation driven

[roman_mir]

Yes, it is a bubble, but it's not simply a tech bubble, it's money bubble this time. It's all inflation, people are looking for place to park value.

For all the Keynesians that deny one of the 3 major functions of money (storage of value), that's what you do when you print and print without regard to the actual purchasing power - you force people to look into alternative ways of storing purchasing power, and obviously with the interest rates being pushed down by this same action by the Fed and other central banks around the world, there is no yield.

Savers, investors are in a search of yield and they can't find it. That's how bubbles form. While the Fed is trying hard to reflate the housing bubble it doesn't really control what the inflation goes into and when it comes rushing out, so it results in higher stock market prices, higher asset prices that go up in bidding wars, whatever people can think of, anything that is not the paper printed by the central banks.

It will burst, what will be the second worst of the bad is unclear right now but the worst of the bad will be USD denominated debt, bonds, dollars themselves.

Re:Yes, it's inflation driven

[roman_mir]

Oil and gold? Two non-bubbles. Gold isn't even at historic highs, for that it would have to be 1:1 with DOW, and it's nowhere near. Gold is very very cheap now.

As to oil, the US is using smallest amount in decades, it imports smallest amounts in at least quarter of a century, the production capacity is greater than ever and yet the prices are going up in dollars, but not in gold, not in silver. Again, oil is quite cheap if you are not buying it in dollars. It's the dollars that are cheap, and the demand for oil is growing in other parts of the world, which are the productive parts.

Imagine what happens once the Chinese stop subsidising US consumption... their currency shoots up against dollars and for them oil falls in price. So while the American's can't afford their oil, they'll be selling it to the Chinese, who will be able to buy it cheaper and cheaper in their money.

The bubbles that are being inflated are in bonds, dollars. As to asset bubbles, sure, there are asset bubbles. The tech sector is very much inflated.

How is it possible for a company with a price to earning ratio of 100 to go up in price even in dollars without inflation, while gold mining stocks, with PE ratios in single digits going down? This does not show anything at all similar to a bubble in gold and mining stocks, but it shows a very much overheated tech sector.

Re:Yes, it's inflation driven

[roman_mir]

It denies the storage of value aspect of money by not realising that money printing is inflation itself and inflation of money supply causes destruction of value of a single monetary unit.

Keynesians deny this simple fact, which is why they are so confused by something that must seem to them to be a paradox: inflation and simultaneous rise of unemployment. It's not a paradox, it's only a paradox if you don't realise that inflation destroys value of money, thus kills investment opportunities and destroys productive jobs.

Re:Yes, it's inflation driven

[KeithJM]

Gold isn't even at historic highs, for that it would have to be 1:1 with DOW, and it's nowhere near

That's not really a reasonable comparison. First, the Dow is a bit arbitrary -- it follows only a specific group of 30 companies that are supposed to represent the US economy. Here are a couple of articles at different times about what would have happened if Apple had been added:
when apple was up: http://usatoday30.usatoday.com/money/perfi/stocks/story/2012-02-15/apple-stock-dow-jones-industrial-average/53109426/1
when apple went down: http://blogs.marketwatch.com/thetell/2013/03/05/apples-not-in-the-dow-thank-goodness/

Basically, that would completely change the value of the Dow and we would all be panicking right now, as the down dropped with Apple stock. On the other hand, around the election, people would have been crowing about the stock market hitting all-time highs.

So apart from comparing an historically trackable value, like gold, to an arbitrary measurement like the Dow, they also track different things. You're comparing gold's value to something which is trying to track the overall US economy. And the US economy is MUCH bigger than it was at the turn of the last century. Gold shouldn't mirror the US economy. If it did, THAT would be a definite bubble.

Re:Yes, it's inflation driven

[HornWumpus]

There are no Keynesians. Keynesian's would run surpluses during good times.

Those who call themselves 'Keynesians' are just money printers who found an economic philosophy to act as a fig leaf.

Re:Yes, it's inflation driven

[KeithJM]

I never claimed that gold WAS in a bubble, and I never suggested that the value of gold should be related to the dollar. All I did was quote one line and reply to that line. Everything else you think you read (and thought was "interesting, interesting,") came from your own mind, not from my text.

Assume for a minute that the Dow is a perfect way of tracking what it's intended to track, with no flaws. So it perfectly mirrors the US economy. The reason you buy gold -- rather than invest in the stock market or anything else dependent on a money economy -- is because you assume the money economy may either completely collapse, or at least develop another great depression or something similar. In those cases, even if the Dow reduced to zero, gold should still maintain its value, because it has value that isn't derived from the value of the dollar, unlike the Dow.

So my point is that expecting the Dow to mirror the US economy (or the Dow) on the way up is ludicrous, since the whole reason to invest in gold is because it WON'T MIRROR THE DOW on the way down. The two derive value from completely different things, and in fact, that's the only reason people buy gold.

If you think through your own argument (that the dollar is an arbitrary measure of value), you'll realize you agree with me. The Dow is much more closely tied to the dollar than gold is. If gold is growing at the same rate as the Dow, it has somehow become tied to the value of the dollar and the size of the US economy. That would make it a gold bubble, which is specifically what my post said.

Re:Yes, it's inflation driven

[frank_adrian314159]

Keynesian's would run surpluses during good times.

Yes, which is what Keynesian economics advocates. Also, these surpluses should be used to pay down debt that was accumulated during the last economic downturn or accumulated to make a rainy-day fund to shore up the economy during the next economic downturn or (and conservatives will be shocked by this) taxes be reduced so that there is no longer a surplus.

However, parent also seems to confuse what is recommended by Keynesian economists (who broadly believe these recommendations) and the actions of the politicians, who often ignore actual economists (of any stripe), which seems to be some odd tactic to discredit Keynesians simply because (just like most normal people) politicians don't listen to them.

Re:Yes, it's inflation driven

[AK Marc]

You are arguing that they have no money. So, someone with $10,000 in credit card debt and $100 in his pocket has "no money" because the $100 bill in his pocket is not money? Your reality doesn't agree with anyone else's. The presence or absence of a credit card debt doesn't change the status of the contents of his pockets.

Re:Bubble

[houstonbofh]

That is not the right question. Of course it is a bubble. The question is, "Where in the bubble are we?" Just starting, or about to pop?

Re: Well, duh.

[kurkosdr]

Well, there is a kind of "social" craze going on, along with a "apps" craze (local and cloud-based), based on the belief that every "social" service or every app that is somewhat popular and runs ads (or has micro transactions) is destined to make profit. Much like in the Web 1.0 craze, there was the belief that every site that sells stuff will make money. Once again, meaningless numbers are thrown around (like "X million members!" never mind how many of them are active and how many of them are real) and ridiculous profit and value estimates are made. And the bubble feeds itself... I just hope that after the bubble bursts, we are not going to see people holding "will code apps/social websites for food" akin to "will code HTML for food" we saw when Web1.0 craze burst.

Re:30 million dollar purchase?

[hsmith]

Jesus, do you people even think before you write this insane stupidity?

The seller pays long term capital gains on the purchase price (IP qualifies instantly for LTCG).

The purchasers get to use it as an expense.

Tax avoidance? Do you even understand how taxes work?

The obvious answer is...

[Anonymous Coward]

No.

Insane financial valuation theories mean we're in a bubble. Big money acquisitions can happen for a number of reasons. A lot of them are side effects of the insane theories. This one isn't.

They didn't pay $30 million for the App with no monetization potential, the second sentence of the first link is "Yahoo said it plans to close down the actual app and use the algorithmic summation technology". They paid $30 million for his algorithm and to hire the talented mind that conceived it. I don't know what's unique about his algorithm or it's results, but that's what the acquisition was about, not the app. Apparently it can do something Yahoo's wanted to do but was unable to accomplish. It may have been a bargain.

The first sentence of the summary contains a claim invalidated by the second sentence of the link. Seriously? Not even the submitter or the editor could RTFA?

Re:what?

[i kan reed]

I don't care too much, but I think the theoretical problem is this: Makerbot used the open-source community to help popularize their product because it was open source. Now they're switching to closed source, it feels like a betrayal of the people who helped them to get popular.

Like I said, I don't care, but it's a perspective I can understand.

Trying to stay relevant ...

[gstoddart]

I think what we're seeing is a bunch of tech companies who got rich in the .com era struggling to stay relevant.

I assume Yahoo still has a search engine, but I've not been inclined to use it or look for it in a *long* time -- like since Google came into existence.

Now with Facebook and all of these other companies which are relatively recent, the old guard is trying to make sure they keep market share and features people want.

And, really, the tech industry has been going through fairly steady acquisitions for quite a while ... it's become normal operating procedure. Buy a company with a product you like so you can get their features and customers, and hopefully integrate the features into your platform.

We may or may not be in a tech bubble, but tech companies have been buying smaller companies for years ... that's just how companies grow these days.

Re:30 million dollar purchase?

[Sarten-X]

What would happen if you were to try to write off even a few thousand for mysterious "software" that's market value was comparable to existing "free" equivalents?

Assuming all applicable taxes were paid appropriately, nothing happens.

This is somewhat common. A company, based in Ireland or whatever country is cheapest, sells its services to its American parent company. The American company deducts the expense as the cost of doing business, so it avoids large US taxes. The Irish company pays Irish taxes on its income, but since the rate is lower than it would be in the US, less taxes are paid as a whole. The money then sits in the accounts of the Irish company until it's needed elsewhere.

Yes, it's avoiding paying taxes. No, it's not tax evasion, and it's not illegal. The United States allows companies to deduct certain expenses, and Ireland charges a lower tax rate.

Re:No

[PolygamousRanchKid]

Bubbles are funded by outside investors. In this case, the money for the big aquisitions comes from other tech companies, which means that they have a way of making that money somehow.

. . . which means that they think they have a way of making that money somehow.

Re:Bubble

[Rob Y.]

We've been in a bubble economy-wide since the crash of 2007. It's (more or less) intentional, fueled by artificially low interest rates and the Fed pouring money into the banking system. That money has no place to go, so it goes into whatever's trendy at the moment - whether there's real value there or not.

Everyone (again - more or less) agrees that the economy needed the stimulus, but a better approach would have been to pump the money into the economy via smartly targeted (or even non so smartly targeted) direct government spending. Funded, if possible, by new revenue streams themselves defined to have little effect on employment and other economic activity. But we don't have either a functioning market economy or a functioning democracy capable of managing the economy through the political system. So we go from bubble to bubble - or crash to crash, depending on how you view it.

Re:Acquisitions over Taxes

[dehole]

It is in their best interest to take advantage of any loophole, just as normal people would go to a tax accountant to get the most money for our tax return. To do otherwise is silly. Do you really pay more taxes than you should?

If there are loopholes in tax laws, then our representatives should fix those. But our representatives don't represent us, they represent the corporations which spend money lobbying. Perhaps the Onion piece about America hiring a lobbyist is what we should do to get some representation...

Re:Bubble

[bluefoxlucid]

Keynesians criticizing other Keynesians for being Keynesians. If you all backed off and shut it and let the damn thing crash, we could get back to having a stable market after we pick the pieces up. Keep hoisting that piano higher while the rope continues to fray...

It is new world bribery and payouts

[sebo2000]

Father works for Morgan Stanly and Mother is some lawyer. People don’t you really see? It is new world bribery and payouts? Yahoo could write “similar” app for much less, but they do not really need it. Kid got 300k from some investors in the past, then raised another million from Li Ka Shing (look him up) Yahoo or whoever needs to pay, can not pay directly to Li Ka Shing any money to avoid audits and conflict of interest charges and lawsuits, so what they do? Pays the kid 30 millions for some stupid app, 29.5 goes to Li Ka Shing (main investor) the rest goes to the kid. Now those investors got paid off. Kid is in the media selling light of hope for all the losers dreaming about another face book, and all the messes and government have no clue what just happened. As they say if something looks stupid and ridicules probably it is.

Re:What's a bubble?

[dkleinsc]

I saw the housing bubble. In 2006, specifically, when working as a programmer for a mortgage titling company. I just saw the numbers going into the database and realized that there's no possible way this could work in the long term - there were tons of refinanced loans for lower monthly payments that did nothing to pay back the principal, which more-or-less guaranteed that eventually the borrower couldn't pay.

I could see it, and I wasn't trained to see it or supposed to be looking for it. But it was there plain as day.

Re:What's a bubble?

[bluefoxlucid]

That's like saying it's impossible to do calculus. A few people can do it.

Re:30 million dollar purchase?

[HornWumpus]

No, it's not wrong to run divisions in various tax rate locations and include those tax rates in your decision making process.

Re:30 million dollar purchase?

[tqk]

Yes, it's avoiding paying taxes. No, it's not tax evasion, and it's not illegal.

it may be legal, but is it wrong?

What's that got to do with it? Companies care about morality and ethics when they have PR value; that's all. If you don't like it, you can complain to your elected reps to close the loophole. Then expect those companies to physically move their ops to Ireland, or get their finance types to find another way around it.

Re:Bubble

[rrohbeck]

Keynesianism is proven to work and austerity is proven not to work, so what's the point here?

Re:30 million dollar purchase?

[AK Marc]

If I make $30,000,000 a year in wages, I pay 30%+ taxes on it. If I buy something for $30,000,000, I pay 0% in taxes (it's a purchase), if I sell something for a $30,000,000 profit and deduct nothing, I pay 15% taxes on it, and it's not hard to deduct $30,000,000 off a sale profit. If it's in a properly set up holding company, I pay 0% tax on it, even with no deductions. And yes, anyone moving $30,000,000 around does it through holding companies and trusts. Likely a $30,000,000 profit will generate $0 in tax.

People don't get how the truly rich work. They live by a completely different set of rules that even the rich wannabe can't comprehend.

Re:Bubble

[AK Marc]

Because you are incompetent?

Re:Bubble

[roman_mir]

Everyone (again - more or less) agrees that the economy needed the stimulus

- please exclude me and millions more people from your 'everyone'. No, there shouldn't have been any stimulus, not a cent should have gone from savers into the pockets of failures via the redistribution system set up by the government.

Re:Bubble

[gallondr00nk]

Keynesians criticizing other Keynesians for being Keynesians. If you all backed off and shut it and let the damn thing crash, we could get back to having a stable market after we pick the pieces up

That is to suggest we had a stable market prior to the crash? We havn't had a stable market in decades, if by stable you mean few or no bubbles forming and no recessions or stock market crashes.

Higher household debt ratios over the last twenty years as a result of falling wages have meant what was previously just damaging is now becoming catastrophic. The 2008 crash was a lot of things, but one of the things we should have learned was that economic growth cannot be funded from debt. Governments across the western world have completely ignored that lesson, preferring to stick to frankly delusional neoliberal economics.

My point is without addressing the death of the western middle class, unemployment, underemployment, falling wages and spiralling debt ratios we will never have a stable market. We'll just have harder and bigger crashes.

Re:What's a bubble?

[HornWumpus]

It's not that hard to see bubbles.

What's hard is timing them and making money off of them.

The market can stay irrational longer then you can stay solvent.

Re:What's a bubble?

[dkleinsc]

No, I didn't, because I didn't know how high or long the bubble would go before it popped, and I was completely broke at the time. I did, however, keep the financials completely out of my portfolio.

Also, buying put options is typically less risky than shorting.

Re:Bubble

[Comrade Ogilvy]

What are ascribing to Keynes is exactly the opposite of what Keynes advocated.

The stock crash that heralded the coming of the The Great Depression was created by the policies you criticize -- policies lauded by the Republicans and Wall Street at the time, as a matter of fact.

Keynes observed that when there is significant underutilized productive capacity, there was risk of a deflationary spiral that further disrupts production. Government spending under these circumstances can have a strong positive effect for little dollar cost or risk to long term economic health. It did not take a genius to recognize that when people were starving and shoeless, shoe factories were laying people off, and farmland was left fallow about being repossessed by the bank, a little stimulus can create a lot of useful growth "out of nowhere", without violating any law of thermodynamics. All it took is a little common sense.

The question is whether we have significant underutilized productive capacity in the American economy today. I do not have a strong opinion on that point one way or another.

What I do believe is that a little inflation, by means of monetary hocus pocus or whatever, is probably a good thing when the economy is weak and we were recovery from an asset bubble in housing. That relieves pressure on the housing market, by bringing some homes out from being "underwater". While not glamorous that was probably the right policy to pursue over the last several years. Whether it is worth continuing those policies for much longer is less clear, because the fall off in construction has brought home prices and rental prices roughly in line with the long term historical norms.

Re:Bubble

[AK Marc]

Essentially the core tenants of Keynesian economics are that bubbles burst and this causes a problem, so keep pushing the economic knobs to keep the bubble going forever.

I think the reason it gets such a bad rap is that the people who don't like it don't understand it. Spending stimulates the economy. That is all. The rest is applications of it.

If you personally save money when you have a job for times when you might be without one, then dip into the savings when you are jobless (and yes, this includes retirement), then you are Keynesian. Anyone who saves for retirement follows this economic model. If you plan to work until 2 hours after you are dead (to pay for the funeral), then you are not Keynesian.

All the rest is implementation detail.

Re:talent acquisition

[jafiwam]

The tech community is going to be down on Yahoo until they stop fucking up their email service. It's that simple. They have a decent portal going, but the email is continually hacked via JavaScript or has problems. When that is fixed, the nerds will stop cursing them every chance the get. "my email is broken again" "stop using Yahoo email like I told you last time you dumb fuck."

Re:30 million dollar purchase?

[fearofcarpet]

I gather the way it works in Multinational Corporation Land is that the holding company with the cash is a "subsidiary" that is a PO Box in Ireland that buys a $100,000,000 asset from the USA-based parent company for $30,000,000. The USA-based company then buys the app for $30,000,000 from a third party, sells it to the subsidiary for $1 and claims a $69,999,999 loss to the IRS. The subsidiary then licenses the app back to the parent company for 110% of the revenue generated by the app in a package deal that includes transferring the $100,000,000 asset back to the USA-based company (companies can be tough negotiators with themselves). All the profits are booked in Ireland and the losses in the US and the headline is "USA-Based Company Buys $30,000,000 App." Then again, maybe I just don't understand all this complex business stuff, which is why senior executives make 400X my salary.