In Silicon Valley, mergers must meet the toothbrush test

When deciding whether Google should spend millions, even billions, of dollars in acquiring a new company, its chief executive, Larry Page, asks whether the acquisition passes the toothbrush test: Is it something you will use once or twice a day, and does it make your life better?

The esoteric criterion shuns traditional measures of valuing a company like earnings, discounted cash flow or even sales. Instead, Page is looking for usefulness above profitability, and long-term potential over near-term financial gain.

Google’s toothbrush test highlights the increasing autonomy of Silicon Valley’s biggest corporate acquirers – and the marginalised role that investment banks are playing in the latest boom in technology deals.

Many of the biggest technology companies are now going it alone when striking large mergers & acquisitions. Companies like Google, Facebook and Cisco Systems are leaning on their internal corporate development teams to identify targets, conduct due diligence and negotiate terms, instead of relying on Wall Street bankers.

“Larry will look at potential deals at a very early stage,” said Donald Harrison, Google’s vice-president of corporate development. “Bankers can be helpful, but they are not necessarily core to the discussions.”

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