Acquisitions in Tech have a Checkered History

on February 16, 2017

Acquisition strategy has been in the news this week. Apple CFO Luca Maestri was asked at a Goldman Sachs conference about how the company might use its cash in the wake of a repatriation tax holiday. He downplayed the potential for acquisitions while reiterating Tim Cook’s point that Apple doesn’t reject deals on the basis of being over a certain price point. There’s also been reporting this week about Apple’s negotiating strategy during acquisition talks hurting its ability to close big deals. In that context, it’s worth looking at the history of consumer tech acquisitions and how they’ve fared.

I’ve focused this analysis on a handful of the largest and most acquisitive companies in the consumer tech sphere and used data from Crunchbase to identify those deals worth over $100 million. The charts below show both the total value of these deals and the average deal size for each company:

As you can see, there’s a big range here with Microsoft coming out on top, in terms of total value of the deals, and Facebook coming out on top with highest average deal size (heavily affected by its $19 billion WhatsApp acquisition). Among the larger companies, Apple and Amazon have done the smallest total value of deals over $100 million, while Twitter’s total is quite a bit less.

If you narrow the focus to deals over a billion dollars, which might reasonably be considered “big” deals, an interesting picture emerges – here’s the listing of deals I found which match that criterion:

Microsoft is most represented on this list, in part by virtue of being one of the longest-standing companies in the group, but also because it seems particularly willing to do these billion-plus deals relative to others. It has eight out of the 19 deals shown with Alphabet second at five. Apple only has one entry on the list (Beats at $3 billion) and Samsung also has just the one, with its recently announced Harman deal at $8 billion.

How, then, have these various big deals fared? It’s worth looking at them in several categories:

  • Big successes: I’d put Instagram, DoubleClick, YouTube and Zappos into this camp – each of those companies has been a massive success for its new parent
  • Big failures: Skype, Motorola Mobility, Nokia, and aQuantive all belong in this list – each was either resold at a much lower price, written down almost entirely by the acquirer, or has simply failed to perform
  • Solid successes – I’d say this group includes Beats, on the basis of the solid success of Apple Music (but also part of the declining accessories business at Apple), Fast Search and Transfer at Microsoft (now Microsoft Development Center Norway), Waze, and Navision (although it could be argued it belongs in the big success bucket as a foundational piece of Dynamics).

Many of the rest of the deals are too early in their tenure at their new homes to be certain how these acquisitions will fare long term. The LinkedIn deal just barely closed, while the WhatsApp deal has been closed for some time but Facebook hasn’t really turned on monetization for it yet so it’s hard to tell whether that will ever pay off.

Some companies seem to fare particularly poorly. Microsoft has three of the four big failures, with Alphabet having the other. But it’s also done well with some deals and all the big failures happened during the Steve Ballmer era rather than under new CEO Satya Nadella. Alphabet’s deals have mostly done well, Facebook’s are a mixed bag, and Samsung’s only big acquisition looks smart on paper but hasn’t even closed yet. Apple has only the one pretty successful acquisition on the list.

The reality is M&A is a risky business, with one of the biggest challenges being cultural fit. That’s particularly challenging at Apple because it sees its culture as both unique and uniquely important. That means smaller deals for technology and tight-knit teams of people are a better fit than massive established businesses with large workforces. For other companies with more generic engineering and software cultures, such acquisitions may be easier.

But it’s also fair to say the biggest failures include several attempts to use big acquisitions as levers for massive strategic shifts, while the most successful acquisitions have often been logical extensions of existing businesses. Skype, Nokia, and aQuantive at Microsoft all fell into the former category, for example, whereas Zappos at Amazon, YouTube and DoubleClick at Google, and Instagram at Facebook were all fairly adjacent businesses. Big strategic shifts have rarely been enabled by taking on entirely new and different businesses – those are often best established through organic change or technology acquisitions which enable broader changes.

To me, it looks like the smartest companies in this group understand this and are very discerning about the acquisitions they make. In some cases, that probably means looking at a lot of deals they eventually pass on and, in other cases, it means losing out to companies willing to move faster on due diligence. But that’s the price you pay for a careful acquisition strategy intended to protect a corporate culture rather than bring change at any cost.