Public Markets

Here’s How Much Google Almost Overpaid For Snap

As Snap continues to struggle as a public company, new reports indicate that the photo-sharing company was close to not going public at all.

According to a report by Business Insider, Google, a component of the Alphabet collective, “floated an offer of at least $30 billion to buy Snap in early 2016.”  The timing of the purported offer and its scale is interesting.

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Since Snap was kind enough to turn down the alleged offer and go public, we can take a peek at its numbers from the time frame during which Google was snooping around with a checkbook. From there, we can determine how much Google nearly overpaid for the asset.

And So It Begins

In Alex Heath’s piece, he makes a few notes concerning timing. First, Google’s tender came in “early 2016.”

That’s good, but Heath narrows a bit as well:

Google’s initial offer would have been discussed just before Snap raised its Series F round of private funding in May 2016, valuing the company at $20 billion. CapitalG, the growth equity fund managed by Google’s parent company, Alphabet, ended up quietly participating in the round.

That Series F, to refresh our minds, raised $1.8 billion for Snap at a pre-money valuation of $17.5 billion. In total, Snap was worth around $19.3 billion when it was completed.

Google was, therefore, willing to pay quite a lot more for the whole company than private investors were willing to pay for part of it. (That’s not surprising. Buyouts tend to come at a premium to current asset prices. In this case, the best comp we have for the current price of Snap is the firm’s next-private value.)

So Google was willing to pour oceans of cash onto Snap back when it was earlier in its monetization cycle. Let’s look back.

How Mature Was Snap?

Snap’s Series F was announced in the second month of the second quarter of the year. Presumably, it was wrapped up a bit before it became known. As such, it’s a bit hard for us, at this distance, to decide which quarter is the more effective metric to use as a reference point. Put more simply, if we want to understand how much Google was willing to pay for Snap, we need to understand how much revenue the smaller company was generating at that time.

If we choose the first quarter, we are selecting a more conservative — smaller, in this case — figure to use as the denominator in our impending price and sales multiple. If we choose the second quarter, we are using a metric that includes performance after the deal was made. Luckily, we are kind souls here at Crunchbase News, and it’s Friday. We’ll be liberal in our approbation of Snap’s prior revenue growth and go with the second-quarter number.

Now, what we want is that number’s trailing result. So we’ll add up the second quarter of 2016 and go back three more quarters. That works out to revenue of just over $160 million. Not bad, given that the figure is a huge multiple on what Snap generated in the preceding twelve months.

Quickly, if Google was willing to drop 30 billion dollars on the company, it would have paid an effective revenue multiple (price/sales) of 187.5.

For comparison, some industries have groups of players that trade for a price/sales multiple of less than one. In tech, SaaS companies can trade for 5 to 10 times revenue, and not be too far out of whack. But Snap was something unique, and it was growing fast. Those facts drive up the price.

So how much too much was Google’s offer?

Far too much, as we can see now from our time-afforded distance. Private investors slapped the $19.3 billion value on Snap around the same time as the Google offer.

The Series F round, using our same revenue result, worked out to a revenue multiple of 121 or so at the time. That is still very high, but it is smaller than what Google was willing to dosh about.

Today, Snap is worth just 30.74 times its trailing revenue, according to Yahoo Finance. That the firm’s price over sales multiple has come down as the firm’s growth has decelerated is the opposite of surprising. But what is notable is the far-higher ratios investors, and a public company, were willing to pay for the firm just over a year ago.

Everyone got it wrong, it seems. Snap today is worth $15.84 billion. A huge sum, and precisely nothing to sneeze at. Still, it’s far less than what it managed to garner before.

Illustration: Li-Anne Dias

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