Linden Lab’s acquisition: sundry thoughts & speculation

It’s been a week since the news broken that Linden Lab is in the process of being acquired by new owners (see Linden Lab announces it is to be acquired, July 9th, 2020). Since then there has been a lot of comments and speculation ranging from the entirely positive to the inevitable “we’re doomed! / the sky is falling!”

Some have raised concerns that neither J. Randall Waterfield nor Brad Oberwager have experience with running games companies. However, having hands-on experience in running the type of company in which you’re investing isn’t actually a prerequisite for funding / representing / guiding it. Rather, what’s important is having the ability to understand the company, appreciate its value proposition and being able to contribute to its continued growth; and both Mr. Oberwager and Mr. Waterfield appear to have these abilities. In particular, J. Randall Waterfield, as CEO of the Waterfield Group, comes from an environment where long-term investment in companies to ensure their growth is very much the raison d’etre.

Waterfield buys and builds well-run American businesses.

We prefer basic businesses with a few years of proven, conservative growth. We avoid companies that are growing too fast. We believe slow and steady makes the race… We strive to be a good partner to existing management, are passive with regards to general managerial issues, and work hard to help our CEOs and their families’ realize their vision.

Waterfield’s investment timeframe is forever. We work to grow book value at a reasonable pace with no exit in mind.

– from the About / Investment Criteria page of Waterfield

Now, to be clear, it’s not the Waterfield Group that is investing in Linden Research, but rather a venture between Mr. Waterfield and Mr. Oberwager; but given Mr. Waterfield’s pedigree with long-term investment, is hard not to see him taking the same approach in his other ventures.

Nor should the fact that Mr. Oberwager has sold off three of the businesses he’s built be seen as a negative. Building a company from the ground up is a different matter to investing in an established, profitable entity, and selling the former in order to repeat the cycle isn’t automatically indicative of a intent to buy-in to an existing company simply to sell it on without a longer-term commitment.

Which is not to say a buy-out like this isn’t without risk; with the best will in the world on the part of incoming investors to a company, things don’t always go as planned or turn out as hoped – but planning for failure isn’t generally how investors set about acquiring profitable companies.

A further point to remember is that acquiring a company isn’t something that happens overnight; it can actually take multiple months or even years to progress from an initial decision to sell, through reaching an agreement in principle, to that final closure.

One big part of this process is due diligence, a process designed to make potential investors precisely aware of what they are getting themselves into – things that might alter the deal, such as revealing unwanted risks or unwelcome financial exposure that they might wish to see properly mitigated prior to proceeding further. This means that incoming investors are rarely coming into a company flying blind or are suddenly going to find themselves facing an unwelcome wake-up call that might leave them re-evaluating their desire to retain the company.

On a more interesting – to me at least – level is that given the length of time an acquisition can take – even if measured over months, rather than years – is how closely the decision to sell Sansar might have been tied to the decision to offer Linden Research up for acquisition.

Simply put and despite the effort already put into Sansar, it still has a long way to go before it is likely to establish a sold income-generating business model, and therefore represents a significant revenue sink hole of unknown depth. As such, it would make sense for the Lab to divest itself of Sansar prior to putting itself up for acquisition; doing to removes the uncertainty around that platform whilst leaving the company with a demonstratively profitable product (Second Life) and a second that is just starting to show its potential (Tilia Inc.). Depending on the time frames of the two events, the sale of Sansar might even have been a pre-requisite put in place by the new investors to limit potential risk raised through the due diligence process.

Following the acquisition announcement, there were questions asked through the forums, etc., on why would a profitable company be put up for sale, and statements (such as can be seen in comments on this blog) that you “don’t sell a profitable company”.

Well the fact is that profitable private companies are routinely sold for a variety of reasons, and none of them are “bad” or “negative”. For example, and leaving aside the point that the fact a company is profitable obviously makes it more attractive, a sale can be because the current owners wish to exit the company entirely to pursue other opportunities; or they may simply want reduce their overall holdings in the company as part of a general change in lifestyle, whilst leaving the company with the ability to continue operating successfully (and in the case of the latter, still have their experience / expertise available, should it be needed).

I’m not about to try to second guess what reasoning is at work in the case of Linden Research, but  I am curious as to the shape of the board once the acquisition has been finalised. Will it be just the two new investors (which seems likely), or will one or two of the remaining board remain?

Obviously, how things pan out will only become clear over time, but overall (and such is my nature as a “glass half full” person) I lean towards the feeling that the coming change for Linden Research will prove to be positive.