Acquisitions in the technology sector are as regular as clockwork; however, to judge from the financial pages, they are also fraught with danger. The technology industry has set new benchmarks for the size of acquisitions, but also for value destruction.
Nowhere is that more apparent than in Palo Alto where the bean counters at what was Hewlett-Packard have written off billions upon billions of dollars after the botched takeovers of Palm, EDS and, most spectacularly, Britain’s Autonomy which has ended up in court.
Yet that hasn’t derailed the conveyor belt of companies that launch themselves with one eye already on a sale to Salesforce, Adobe or Oracle. This has manifested itself in the spectacular valuations attributed to hundreds of businesses as private equity companies chase the new Uber, Instagram or Pinterest. There are herds of unicorns lined up in the stockyard waiting for a float or sale and the smart money says many may be disappointed.
Some large companies have abandoned research and development in favour of a frenetic acquisition strategy
For the buyers, the rationale is clear. Companies from Nokia to Microsoft have quickly found themselves on the wrong side of history when ignoring startups. It has not been lost on anyone that Facebook’s bold plays for Instagram, WhatsApp and, unsuccessfully, Snapchat quickly looked very smart.
Investing in startups
For all the stories about young entrepreneurs being stifled by big corporate culture, many large companies are trying to determine how best to both keep hold of and stimulate the talent that led them to make the acquisition in the first place.
Professor William Webb, head of consulting at affini and a former president of the Institution of Engineering and Technology, says that in the race to innovate, some large companies have abandoned research and development in favour of a frenetic acquisition strategy. He points to Cisco, which just paid $700 million for Britain’s Acano, as a “past master” at this strategy. It is not, however a guarantee of success. “Assimilating a startup company is not an easy task,” he says.
Eldar Tuvey knows from experience. He sold his business ScanSafe to Cisco in 2009 and went through that assimilation. “The sale is a time of great optimism, the end of one chapter and beginning of another. You usually expect you will be able to do so much more as part of a larger organisation with greater reach, resources, customers and partners.
“At some point you switch allegiance from the company being sold and worrying about your shareholders, employees and customers to becoming part of the new, larger whole and seeing the bigger picture,” Mr Tuvey recalls.
Having an exit strategy
Yet a sense of regret can kick in. “The disadvantage is that you sometimes suffer from ‘seller’s remorse’. You’re sad to see it all go – and it can be hard having to let go of the ability to control every aspect of the direction of your company – with a team that has grown with you over the years,” he says.
Another issue is that the biggest companies are effectively cherry-picking the best ideas and often letting them wither on the vine once the takeover is complete. Yet the same scenario can play out in the startup world.
Lorne Daniel, an analyst with investment bank FinnCap, says an exit strategy can be crucial to success. “I really don’t have a problem with technology startups, indeed with any business, being launched with an exit in mind. I think it shows strong forward planning and leads to good discipline; hopefully a focus on what is going to be achieved and the timeline for doing it,” he says.
Talent, investment and exits form a ‘holy trinity’ for a healthy startup scene
“Very few businesses have the resources, product range, management or market opportunity for long-term sustainable organic growth so trade sale is a natural conclusion. The alternative is years of stagnation and loss of interest, and that is very unhealthy for investors, staff and customers.”
The injection of talent into a lumbering, older business is a crucial element of the story of mergers and acquisitions (M&A). For every horror show, where the millionaire founders drive away leaving the predator business to slash and burn at their new toy, other companies nurture the talent they have acquired. Companies ranging from ARM to Vodafone have snapped up smaller business and provided a promising career path to the new staff who want a bigger challenge.
No technology sector is more comfortable with selling out than that in Israeli where thousands of deals are struck every year. Unlike in Britain, where newly minted millionaires buy a fast car and retire to the country, Israelis tend to move on quickly and set up new companies or fund others.
“Talent, investment and exits”
Guy Horowitz, who has been on both sides of the fence as an investor and working for startups, says talent, investment and exits form a “holy trinity” for a healthy startup scene. If there are sales, he argues, then investors won’t stick around to support a new crop.
Mr Horowitz, general partner at Deutsche Telekom Capital Partners, says the sale of Israeli stars to Facebook, Apple and Google has the added benefit of bringing those companies to the country which can override concerns about the deal failing. M&A is the real engine behind global investment in new startups, he says.
“Statistics tell us most acquisitions are not successfully digested by the buyer. No one wants to sell to an entity that may spill their baby with the corporate bath water, but there is a sense of purpose behind every sale. In many cases the acquisition brings a much-needed entrepreneurial spirit to a sluggish giant or a short-term technological value that speeds up a much bigger activity. This instant impact shouldn’t be underestimated,” says Mr Horowitz.
WHY DOESN’T GOOGLE JUST BUY TWITTER?
Every six months or so a wild rumour circulates that someone is going to buy Twitter, probably Google. The travails of Twitter and its uncertain business model seem to make it a perfect fit for Google which, despite its behemoth status and repeated attempts to do so, has never cracked “social”.
Its decision to restructure under the Alphabet holding company makes it easier to see how an independent Twitter could be slotted in without killing the social goose that laid the tweeting egg.
Google has spent hundreds of millions of dollars trying to revamp Google+, its attempt to create a social network to rival Facebook, but scaled back its ambitions in August. Gone is the unpopular attempt to bundle it together with more successful services by forcing people to sign into their YouTube account with Google+. Just like Google Buzz, its long-forgotten social network, it has gone back to the drawing board, which opens the door for Twitter.
There was a time, as recently as Facebook’s float, that many in the market saw social networks as frivolous companies. Question marks have been expelled, if not obliterated, by the rampant success of Facebook and its minions Instagram and WhatsApp, which have raked in billions of users and, more importantly, invaluable data about these people in terms of who they are, what they like, where they are and who they talk to.
Google may have struggled with social, but it is this data element where it has shown its vulnerability after signing up to access Twitter’s data “firehouse”. Such deals are crucial to Twitter, which allows IBM to plug its data into Watson to create insights, but also shine a light on where Google is sorely lacking.
Chris Sacca, an investor in Twitter and a former Google employee, articulates what everyone was thinking in June when he describes the two businesses as an “instant fit”. “They’ve never understood social, they have never understood those personal interactions. This bolts right in cleanly,” he says.
Of course, it is no fait accompli and many argue that it will never happen. Google typically buys startup companies and lets them blossom. Android, YouTube and DoubleClick may be famous now, but were obscure when they were brought into Google. The one big “name” acquisition it made, Motorola, was a disaster and Google cut its losses quickly. Add to that the return of co-founder Jack Dorsey to Twitter. Perhaps #sold is still someway off after all.
Investing in startups
