TL;DR
– Why all deals come down to their terms
– A new thought experiment: why MSFT should buy SHOP
🧠 The Takeaways
Today we’re taking a new direction and covering why I think Microsoft should buy Shopify.
The next evolution of consumer AI Agents is buying directly from the query.
Shopify would put the last piece in Microsoft’s AI ecosystem tooling.
The new ads model Microsoft + Shopify could create.
+ Why terms are more important than you think.
Newsletter-wide disclaimer: As always, this is not legal, financial, tax, or any other sort of advice. I have no insider knowledge on Microsoft or Shopify. And I was never here. 😉
LBAB Community – All deals come down to the Terms
Deal terms are so much more important than people realize. They not only dictate how a deal gets done, but also usually how the next 3–5 years of the seller/buyer’s lives.
Everybody sees biz A selling for X or biz B acquiring biz C for XYZ. But those headlines don’t capture the deal’s terms, which actually cover who’s getting paid, for how much, and in what way.
A few common payout methods for SMB + Mid-Market deals:
Cash at Close: The pretax $ the buyer is wiring the seller based on acquisition value. (This is what everyone thinks the headline number is delivered in). A large pile of money. While this is always a component it usually isn’t the only way sellers get paid.
Seller’s note: The seller gives the buyer a loan to pay over an agreed upon timeline, usually paid out of biz proceeds. (This is a lot more common than you’d think).
Earnout: The seller gets an agreed upon payout if the biz hits goals under the buyer’s management. E.g., The seller asks for more than the buyer is willing to pay up front, but if the biz throws off $3m in profits over 2 years, they’ll receive $2m on top of the initial cash at close. (Though if the goals aren’t met, the seller doesn’t get anything.)
Plus, there are important terms like employment + equity agreements.
Employment: Will the seller remain at the biz or move on to their next project (or the beach)?
Equity: Will the seller roll equity or are they getting equity in the new co. as a part of the acquisition value? When you see public companies do this, they’ll give the seller stock in the new biz, @ essentially the same price.
Usually when deals get done it’s a combination of multiple of these methods plus 100+ ways to get a deal done. And how each component is structured means millions for each party.
So at the end of the day, you may see biz X gets bought for $100m. That doesn’t mean that the original owners of the business are walking away with $100m.
There’s almost always some combination of the above terms. And those are just some high-level categories. There are hundreds of ways deals can get done.
In the end, it’s really important to think through what the implications are of the terms that you’re getting. Not just what’s the total value of what you’re selling your business for.
Let’s Talk Deals
Microsoft’s multi-billion dollar investment in ChatGPT needs an eCom backend to power the AI future.
Now, as a long-term Shopify investor, and someone who believes Shopify will become a $1T biz, I’m not hoping this happens, but I do think it’s an important exercise to understand what the next decade of eCom may bring.
Today, we’re going to go deep on why Microsoft ($3.2T Cap) should buy Shopify ($84B).
Deal Terms
Instead of the usual financial review, today we’re going to break down how this deal could get done and what terms there could be.
Microsoft is SOOO big that they could do this deal however they wanted. Considering they did $88.5B in Operating Income last year they could buy Shopify in an almost all-cash deal, but that would be highly unlikely.
But since the market rate to acquire a public biz is a 30% premium, we’re going to offer $110B for Shopify, pushing this into a mixed sale.
At this scale, it would probably be a balance of Cash, Debt and Stock. I’d probably structure this as a 50/50 Cash/Stock deal since Microsoft’s equity is so valuable.
M&A Note: Typically, for large deals, it’s hard to negotiate a large stock position in an acquisition like this, but Microsoft’s stock is the opposite. It’s so valuable Shopify owners would want it.
TLDR Terms:
50% Microsoft Stock: 123m shares @ ~$445/share
50% Cash: $55B in Cash (20% down and 80% financed through debt)
Microsoft would only come out of pocket $11B in cash today (+123m shares) to own Shopify outright and plug the SMB eCom platform into the future of AI.
The crazy part is this would be a similar level to their OpenAI ($13B) investment. Now, that deal was mostly done in compute credits, but still interesting to see the market net out at a similar place.
Let’s Make This Deal!
Here are the 3 reasons this phase shift in eCom will play out.
1) Transactions are the LLM future
Microsoft’s obvious big bet of the next decade is AI. From their gargantuan investment in OpenAI to how involved they’ve been in the biz… You can call it an investment/partnership/ whatever you want, but Microsoft is clearly betting the farm on this play.
So, let’s fast forward to the natural end state for the ChatGPT/Gemini experience.
From using both a bunch, the obvious end state for the user experience is transaction in the chat.
Query -> Result -> Purchase.
When chat can’t handle the purchase directly, it’ll kick you to an LP the same way an ad platform would today.
Microsoft will own the entire top of funnel collapsing the old school Facebook + Google + Home pages/LPs, UX it into an Agent Query/+ LP experience.
So what becomes existential for these platforms to own? Native Cart + Payment processing (Shopify’s real golden goose).
+ Shopify has the native checkout to support the scale. They have the:
Simple SMB onboarding for millions of brands to launch.
Tech integrations across the stack for all common use cases. (Including Payment processing)
Templatized eCom CX to simply plug into the ecosystem.
This isn’t a simple integration, but it would be the next evolution of the Sales Channel/Buy Button technology. All the product, shipping, and payment information will be automatically synced, so the user can easily buy from 1-2 prompts instead of 25 clicks.
Takeaway: Query -> Purchase is the future.
2) Microsoft is building the complete eCom infrastructure stack.
Microsoft has been rolling out AI enablement tools like their lives depend on it. When you tie them all together, it’ll build a self-feeding AI eCom platform:
#1 Microsoft Clarity: A hotjar competitor, and in the Shopify Plus space, it’s basically become the new Google Analytics. It’ll gain mass adoption, as eCom owners want a free solution to monitor onsite performance.
But when you think about how templatized the Shopify site UX already is, and now you have a system that will gather data on the live experiences of how customers interact with the majority of Shopify traffic, 1 thing becomes insanely obvious.
Microsoft will have all the training data it needs to build the completely optimized eCom site experience + continually optimize the experience. A crucial foundational step.
#2: Copilot: The developer’s best friend, who writes and reviews code. Some bizs are already seeing 30-40% of their code base written by Copilot.
With the mountain of data Clarity will collect on how users buy + why they drop off the next step. Copilot will build and self-optimize the websites. In theory it could create truly 1:1 personalized site experiences based on each shopper’s behavior (long bet).
Similar to how Tesla autopilot constantly learns the best ways to drive on new /different terrains by processing billions of data points from watching humans drive on those roads, Microsoft will be able to do the same, but for Site experiences.
With the Purchase data from Shopify, Microsoft would be able to build the ultimate CRO machine.
#3 ChatGPT: This one is the simplest, but once you have the system humming, the last major component of an eCom site is the content. If you have ChatGPT query data + generate content, it becomes a prediction game of what content will get you to buy.
Microsoft can launch the greatest individual-level multi-variant testing model, where the content + experiences are constantly being updated, personalized, and optimized to drive the purchase.
It would consolidate what today takes a team of 15–20 people down to 1–2.
Takeaway: CRO becomes a self-feeding AI system.
3) The Future Biz model
Yes, the above will implode the current Search ads model, but…
The payment process alone will be enormous + create a new ads model.
Ads is an insanely high margin biz, but Microsoft has lost both of the last major digital advertising waves Search + Social. If they can steal 30% of the $$$ in those markets, they’ll add $1T+ to their market cap.
The simplest way to do so is to create an experience so great that it collapses the current model. The reason why Social took over and dominated Search was because it provided advertisers the opportunity to run ads in people’s day-to-day lives.
Search ads are incredibly valuable, but is trigger based. Everyone is searching for information daily, but only when they already thought to search. It’s a trigger-based UX that allows advertisers opportunistic moments to run ads.
Social ads are the opposite. Social has daily users who are always on and can always be advertised to.
The AI Agent model will be the next evolution of that and fit somewhere in the middle. People will use it more frequently than Search, and it reaches into more functional and helpful use cases in your life, but won’t always be like Social.
The real opportunity is the next wave of ads.
When you search the Internet today and can’t find what you’re looking for, that kills your search. If I get to a site and they’re OOS on the product, I abandon. Or start the process all over again from scratch.
If I had an agent query the internet and not find what I’m looking for, that is the perfect time to advertise to that consumer to drive an immediate purchase.
Ex. I need more diapers.
I tell my AI agent to buy more, but the site I usually buy from is OOS.
Then Target/Walmart/Instacart show ads for purchase and pick up or delivery options.
In the past I would have to search/call all the local stores in my area. Starting from 0. In this new paradigm the AI Agent will just present more options. In a moment the advertiser knows it can win the sale.
It requires a deeper integration of data, but also creates a new ad and buying model that currently doesn’t happen end to end online today.
Takeaway: Microsoft grabbing a real % of digital ads creates Trillions in value.
Final Thought
What makes this deal the no brainer win-win that makes it worth billions?
Shopify gets the consumer app it’s always dreamed of:
100m–1B consumers using an app daily that will drive Awareness + Purchases for millions of merchants.
Deep integration with the ChatGPT data set.
Access to resources it’ll take them decades to amass themselves.
More processing power then their 5 year budget.
The real beauty here is for Shopify specifically is that they’ve already templatized the eCom experiences. So while that may sound like a negative, it actually makes them the perfect puzzle piece for an app like ChatGPT that is trying to bring the world’s answers to one consumer app.
The more and different use cases an app like this needs to solve for, the more important having a simple, flexible system that can handle the 80/20 use cases. As ChatGPT continues to streamline the result experience, adding a simple checkout interface is what unlocks the next phase shift.
It would present some interesting challenges for Shopify’s relationships with the other major Tech players (Meta, Google, Amazon), but the Microsoft rocket ship will make the diplomatic issues worth it.
And why would Microsoft drop the GDP of a small country on Shopify? Because they would get direct access to:
Millions of active selling merchants + their catalogs
A Simple cart integration to power the billions of ChatGPT queries
All the purchasing and payment data across the Shop ecosystem
FINALLY a good use for Bing.
Plus the biggest value of all for Microsoft’s stock price. It would own non-Amazon eCom.
