To keep pace with technology, as it invades more of the economy, traditional companies like General Motors and Walmart have turned to startups. Just last summer, Walmart swapped its Chinese E-commerce operation for a five percent interest in JD.com. Earlier in the same year, General Motors purchased nine percent of Lyft for $500 million.
While these investments serve strategic goals, they also have financial rewards.
Walmart: On the last earning call, Walmart said its alliance with JD.com helped to bring “Walmart and Sam’s Clubs’ brands to millions of new customers”. Walmart also announced the purchase of more JD.com stock which did very well last year; from Walmart’s first purchase in June 2016 to the end of the year, JD.com’s stock price increased about twenty five percent.
General Motors: General Motors invested in Lyft partly to get exposure to the ride hailing business. At the time, Lyft was worth about $5.6 billion, but that valuation is expected to increase to $7 billion as Lyft seeks to raise more money. If that’s true, then General Motors would have also seen about a twenty-five percent increase in its investment.
GM does nothing with Lyft. In its recent 2016 10-K, General Motors didn’t write down its $500 million investment in Lyft. A nine percent interest of Lyft was purchased by GM back in January 2016 which valued Lyft at $5.6 billion. Corporations will generally reflect permanent write-downs, in their cost method investments, as impairments. General Motors did not do this last year, so they still think Lyft is worth at least the $500 million paid a year ago.
The acquisition price for Cruise paid by GM is $581 million? The reported consideration was $291 million in cash and $290 million in newly issued GM stock. But due to an earn-out of $109 million, the final price could be higher ($693 million) or even something less.
As with other tech startups with many unknowns, the ultimate price depends in part on the completion of non-financial goals. GM reported the earn-out details in its 10-k released today:
…result in future costs contingent upon the continued employment of key individuals and additional performance-based awards contingent upon the achievement of specific technology and commercialization milestones.
GM set aside restricted stock of $109 million for the earn-out. So maybe, the total acquisition for Cruise will be $690 million. “Maybe” because the total price depends in part on the restricted stock’s value when the earned-out is finally paid out.
On the acquisition date of May 12th, the price of GM’s 3,419,028 shares of restricted stock was $31.30. And on July 21st, GM’s stock price was higher, $32.03. So as of today, the total price is approximately $3 million more or $693 million.
Even that price may be change, because the total amount also depends on meeting technical rather than financial milestones. Some may say: it’s easier meeting a sales target than solving an engineering problem. But if Cruise can do the latter, then the team will be richer.
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