In the world of investing there’s a saying about “renting” Warren Buffett’s name. Since an investment by Buffett has a tendency to boost the share price of the company invested in, he’s long been able to command good terms ahead of committing capital to a corporation. These terms include warrants that position Buffett to buy shares in the future at potentially steep discounts.
Companies are said to readily agree to Buffett’s terms. Again, it’s a good deal. His reputation as a stock picker means businesses get a boost when the Oracle of Omaha associates himself with them.
This came to mind while reading a recent front page Wall Street Journal article about Amazon. Written by Dana Mattioli, the article claimed in downcast fashion the downside for businesses that “want to land Amazon Inc. as a client for their goods and services.” So what is it? In certain instances Amazon claims for itself “the right” to “buy big stakes” in public and private client companies “at potentially steep discounts to market value.” Cruel exploitation! Where’s AOC, Bernie, or Sen. Warren?
Back to reality, $1.7 trillion Amazon is one of the most valuable, innovative, and well-regarded companies in the world. Talk about “renting” a name. To operate in client fashion for Amazon would have to be one of the biggest “door openers” of its kind. Translated for those who need it, if your business is meeting the needs of one of the world’s most valuable, innovative and well-regarded companies, you’re likely able to secure sales-pitch meetings with just about any other corporation.
Mattioli refers to the deals struck by Amazon with vendors as “unusual,” another “window into how Amazon uses its market heft to increase its wealth and clout,” plus she mentions that some company executives “felt they couldn’t refuse Amazon’s push for the right to buy” their shares “without risking a major contract.” Where does one begin?
To start, it’s not unreasonable to confidently assert that most business executives – and their investors – would gladly give away a little or a lot of their company to Amazon just to be a client of the Seattle giant. Again, once you’re meeting the needs of Amazon, the ability to sell your services to just about any other major corporation soars. Think about it. Just as businesses offer great terms to “rent” Buffett’s name, it would be difficult to find terms that would cause most any business to turn away from an Amazon client relationship.
All of which raises a question about equity stakes taken by Amazon that Mattioli deems “unusual,” and evidence of the company using “market heft” to attain. Really? It’s more realistic to speculate that the vast majority of Amazon’s vendors (public or private) strive mightily for these “unusual” arrangements, as opposed to being forced into them as Mattioli’s innuendo suggests. To see why, see above. Or continue reading.
If Amazon is more than just a client, as in if Amazon is a part owner of your business with warrants to own more of it, suddenly your ability to get in the door of every institutional investor, private equity shop, pension fund, and investment bank is vastly enhanced. “Wait a second, Amazon has a stake in you? When would you like to stop by?”
Precisely because Amazon is so deep pocketed, precisely because it’s got such powerful access to capital markets, and precisely because it’s a big buyer of businesses it deems additive to its ever-growing mission, an Amazon stake in your business thoroughly transforms it in the eyes of the world’s most important investors. Put another way, Amazon as a stakeholder puts your business in play. If Amazon thinks you worthy of ownership, so must other acquisitive investors and businesses.
Mattioli laughably insinuates that executives “felt they couldn’t refuse Amazon’s push” for theoretically inexpensive ownership, but the more realistic speculation is that vendors of the internet behemoth fall all over themselves for this sort of arrangement. And if they don’t, their investors do! Whatever’s allegedly given away out of alleged fear is more than made up for by investor and/or corporate interest in supposedly fleeced business.
Which brings us to the warrants. Mattioli’s slant is that Amazon “gets” warrants in client companies that position it “to buy the vendors’ stock in the future at what could be below-market prices.” Up front, it’s unlikely Amazon attains those warrants for nothing. While it’s certainly possible that its vendors give away the warrants in return for the many perks of being an Amazon vendor, it’s more likely that Amazon is buying the right to purchase shares in said corporation at a later date.
The above is an important distinction mainly because the future of commerce is always more than a little opaque. What thrives today doesn’t always tomorrow. Mattioli would give the impression that warrants are an easy path to huge returns, except that they’re not. To purchase the right to buy shares in the future is not infrequently to purchase what has no value down the line. Mattioli laments warrants that might make it possible for Amazon to acquire future stakes at “below-market prices,” but if that’s what happens readers can rest assured that the vendor isn’t bothered by the arrangement. Very fortunate is the company that rises in value throughout time, only to have Amazon as a stakeholder in the end. Contra Mattioli, the arrangement is the opposite of bad. See above.
It’s ultimately funny how things change. And sad. Amazon can’t win. Once the butt of jokes of the “Amazon.org” variety, the formerly fledgling business presently meets the needs of billions of customers in ways they never imagined. Put another way, we couldn’t live without Amazon today. Seemingly neither can reporters seeking – and getting – A1 newspaper real estate through reports that are long on innuendo, while short on reason.
Reprinted from RealClearMarkets