In life and in business there is never a perfect marriage. “Until death do you part” is not something you typically see at the corporate alter. While most corporate deals have a longer shelf-life than an Elizabeth Taylor marriage, not many are programmed to last forever. In the world of software and technology M&A, where the sands shift rapidly, the expiration date can come even sooner. While there are diverse ways and means corporate mergers and acquisitions can fail, there are larger obvious items that are easy to enumerate, particularly after a deal post-mortem. Culture clashes, botched integration, tactics vs. strategy, lack of mission and acquihire buy-in can each play a critical role in the potential success of M&A in tech.
If we took Microsoft as our case study and looked simply at some of their most recent larger deals like aQuantive, Skype or Linkedin, books could be written on what went right and what went wrong in each case. Did Microsoft overpay? Was the integration team at fault?
In the case of Linkedin, the company paid some 50% premium over the then current price of Linkedin’s stock. If an efficient public market existed, the internal buyers pushing excess strategic value at MSFT really did a good job selling. We have yet to mention the huge impairment write-down of aQuantive and the paltry performance of Skype as two other flops.
While it is easy to point fingers and make judgements post-facto, the reality is that most mergers are attempting to combine two very different companies. There is more to just combining assets on a balance sheet and revenues on the P&L. The soft metrics in the pre-planning and post-merger acquisition phase are critical components to the deal’s success. It is what my good friend Mark Spickett calls Acquisition Transaction Management (or ATM).
Like marriages, most mergers are not failures from the outset. They simply do not realize the elusive synergies and many of the cost-savings assumed by the M&A peddlers. According to S&P Global Market Intelligence, the post-M&A returns for companies growing by M&A across Russell 3000 companies was worse than those that grew organically. In side-by-side comparisons such firms greatly increased their debt burdens and decreased their profit margins and earnings.
Integration is critical for a number of reasons. If the assets of the target are not quickly and efficiently assimilated into the parent, a whole host of problems can arise. Employees, customers, products and IP can all drop in efficiency–almost overnight. In such cases, immediate value attrition can cause that “great sucking sound” as an acquirer watches the assumed and pre-calculated strategic value ebb away. In tech firms, this is especially fateful due to the need of integrating systems and processes between entities of differing size and differing scope. As such many tech buyers have opted for a stand-alone acquisition strategy wherein the assets, people, systems and even location of the target, remain almost fully intact.
Perhaps one of the more difficult areas to integrate is not the systems or even the people–as difficult as culture issues in M&A are. No, integrating two business models can be extremely difficult, even if the companies represent a good vertical or horizontal fit. Business models are often what create differentiated value in a marketplace. Such standard operating procedures among firms may present a major clash in how the two businesses are operated. It’s only part of the culture clashes that could completely kill any recognized synergies between two separate, yet very strategically aligned firms.
Many deals are aimed at simply improving the buying company’s growth by integrating another faster-growing enterprise. Microsoft is the perfect example with this strategy. For years the company acquired businesses with greater growth prospects (often at a premium) at least in part with the hope that the faster external growth would bolster and fuel their own growth prospects. In most cases, companies simply see a boost in revenue, but shifting growth prospects from one company to another is an ethereal metric that is night to impossible to transfer. Other assets such as know-how, R&D and sales teams can be equally difficult to transition in such a move. It is also easy to get caught in the trap of focusing on growth prospects OR operational efficiency and not BOTH. When a company pays a premium, no stone can remain un-turned when it comes to sourcing opportunities to optimize.
If you had the excess cash to buy Linkedin, why not? I’m sure Microsoft had a fantastic internal “selling” process as to why the buy was a good idea, but ultimately the strategic value has been less clear as time progresses. If no clear mission exists apart from “we are going to acquire this business because we think it will improve our prospects as a company,” there are likely other areas where we can better spend our time.
Not all tech mergers are failures. Not all Microsoft’s acquisitions have been failures either. I am not trying to unduly single them out as the quintessential bad example in every case. That is unfair. There are numerous examples of successful buy-side M&A. I do not have anything against Microsoft either. I think they are one of the greatest companies of our lifetime.
In some cases, acquisitions just work. For instance, Apple’s purchase of chip designer P.A. Semi in 2008 allowed Apple to directly get into the microprocessor market which gave them more control and power over things like battery life and longevity and more control over product design and delivery.
Another notable example was the VMware acquisition by EMC in 2003. At the time EMC was a hardware player, manufacturing storage. By integrating with VMware’s software offering, EMC was better able to take advantage of providing a soup-to-nuts solution for the firm’s data centers.
Being ultra-critical and overly-discerning is likely the most important attribute of a buy-side group within a software and technology company. While the buck stops at the C-level, having the discipline internally to really take a hard look at acquisitions when entire internal teams are devoted to making acquisitions is a tough line to balance. Internal M&A teams may say to themselves, “if we are not making acquisitions, we are not doing our jobs.” The same holds true for buy-side investment bankers who may not get fully paid until acquisitions are made. But, if M&A advisory is done right, more often the most sane thing to do is walk away before a bad deal ensues. Unfortunately, that is easier said than done.