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Widen the market before it saturates
Pressure on returns
Buying more means being less discerning, which puts downward pressure on returns. Better talent density, culture, and technology have offset it so far, and nothing guarantees they will keep sufficing. A wide margin separates current returns from the point where paying dividends would make more sense. Two separate investors told the company, at different scales, that it had been the most efficient and fastest compounder of any serial acquirer they knew. The model does not hinge on razor-thin margins.
Two ways to push back
Two levers push compression back. AI lets revenue grow far faster than headcount. The other is expanding the addressable market, with hardware as a first step and Airtable bringing more enterprise software. Talent, a culture of high performance and truth-seeking, and proprietary technology port nicely to other industries, though not perfectly. The aim is to avoid reaching a point five or six years out where nothing is left to buy except at poor returns.
Going all the way
Picture knowing there were only eight years of runway left. It would still be worth going all the way, with dividends or buybacks to follow. John Wooden's definition of success was that you have done 100% of what you could.
Why do returns shrink as acquirers grow?
The pool of attractive deals is limited, and a bigger company needs bigger or more numerous ones to move its results. Larger deals draw more bidders, and the extra competition lifts prices. Warren Buffett has written in Berkshire Hathaway's shareholder letters that its size is an anchor on future returns. Growing the market in which a company hunts is the other way to keep the pool large.
Why does winning a bidding contest cost returns?
In 1971, the Atlantic Richfield engineers Edward Capen, Robert Clapp, and William Campbell documented that oil companies winning lease auctions often earned less than they expected. The winner is usually the bidder with the most optimistic estimate, so it overpays on average. Economists later named this the winner's curse. The effect grows with the number of bidders.
What happens when a company can't reinvest well?
When a company cannot find uses for its cash that earn attractive returns, it usually pays the cash out through dividends or buybacks. Microsoft, long a growth company that reinvested nearly all its earnings, paid its first dividend in 2003. The payout signaled that the firm had more cash than high-return projects.