by Tom Allen
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For truly transformative M&A – the type that seizes on market opportunity, becomes a competitive differentiator and lends itself to business-model improvement – companies need to look no further than the M&A activity of the world’s most dominant technology players.
Underneath the blockbuster headlines and splashy displays of big cash deal-making lies a rich layer of insight. Indeed, with a bit of reading between the lines, observers can trace the M&A rationale of the likes of Facebook, Google and Apple, and will realize there is method behind what can often appear as madness.
The tech giants of the world are successful by design, not by accident or by virtue of throwing billions of dollars at the latest innovative company and hoping something sticks. Deloitte’s Silicon Valley practice leader Garrett Herbert recognizes the strategic imperatives driving M&A at this level, noting: “Rather than viewing M&A as a 'we have excess cash, let's buy something' [strategy], larger companies are looking at it as a tool to jump into a new market or ramp up a new technology quickly. [...] M&A can solve time-to-market issues and talent issues far quicker than internal activities can." Even these imperatives, which may seem broad, are often intimately connected to critical strategic corporate aims.
The acquisition strategies and implementation processes of the world’s top tech companies have contributed to their dominance. And while they haven’t always been “successful” in every sense, their discipline allows even apparent failures to be absorbed quickly and efficiently – ensuring continual space and resources to advance to the next opportunity.
Learning From the Best in M&A
The reason the world’s biggest technology companies maintain M&A competitiveness is disappointingly simple. While they all help, it is not about brand cache, exceptionally talented deal teams or a war chest of cash. Their enormous competitive advantages come down to this: they have a defined M&A strategy and a repeatable framework to transact under.
For companies in the process of establishing corporate strategies to drive M&A, consider the following 4 examples. Each company below features a distinct strategic aim behind their M&A campaigns and offers a helpful example of how to approach M&A in context with business goals.
As one of the most prolific M&A machines in history of modern technology, Google and its parent company Alphabet have spent tens of billions of dollars on more than 200 companies. Although they appear scattershot in their acquisition approach, as TechRepublic identifies, there are unifying strategic threads in all their deal-making: people, businesses related to core offering (i.e. - search) and investments in technology of the future.
M&A is a critical element to Google’s leadership because they believe in the advantage that top talent with domain expertise will bring to their company. Similarly, by doing deals that enhance the supporting ecosystem around ‘search,’ such as advertising or analytics, Google assumes positive impacts on its primary business model. Finally, by investing in future-oriented technology, Google prepares itself to be a central participant in whatever technology will be mainstream in the years to come. Consider their early participation with Android, or its investments in machine learning and AI, including the eye-popping $500 million investment in DeepMind in 2014, a startup with no product or market, but simply a team of “deep learning” researchers. Two years later, Google has applied DeepMind’s AI system to control the cooling of its data centers, a revenue impact of potentially hundreds of millions per year.
M&A Lesson Learned: Push an innovative agenda around your core competencies to put you where markets are ultimately headed.
The company is cognizant of shifting consumer tastes and the tendency for its user base to migrate to other social platforms. In recognizing this, Facebook has committed to a strategy whereby it will acquire the “...companies who are competing for the demographic, and the mindshare, and the engagement that they are used to having," according to leading venture capital firm, NEA.
Instagram and WhatsApp are indicative of this, with Instagram representing a competing media platform, where the acquisition was about recapturing a wandering user base that was showing an appetite for mobile photo sharing. Facebook explicitly acknowledged this in its 2015 annual financial report, saying:
“We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook products and services, and we believe that some of our users have reduced their engagement with Facebook in favor of increased engagement with these other products and services.”
Keeping users engaged through buying up the features and platforms that have their attention has been a simple but essential tenant of Facebook’s commercial success.
M&A Lesson Learned: Maintain market leadership by establishing ownership where primary customers’ tastes are.
A consistent M&A force over the last decade plus, SAP represents one of the best examples of the disciplined application of an investment strategy. Despite having the balance sheet to support more voluminous spending, the company has demonstrated remarkable restraint – buying companies only with a clear, value-added connection to the enterprise stack. In general, the company prefers to roll up acquisitions to bolster their existing offerings. While a narrow strategy may impinge their ability to bring profitable, new innovations internally, it also has supported a relatively high value-to-acquisition price performance compared to industry peers.
M&A Lesson Learned: Make additions that improve the quality and value of a core offering, instead of distracting resources from what is primarily driving revenue.
In the past three years, Microsoft has spent nearly $62 billion on acquisitions. Under new CEO Satya Nadella, Microsoft has grown both the pace and rigor around its M&A activity. The company’s history of poor M&A (aQuantive, as an example) stands as a stark example of how a lack of corporate identity and strategic guideposts delivers costly failure.
Today, Microsoft is showing a propensity to move past reactionary deal-making. David Welsh of Analyst Street Partners acknowledges:
"You can only make a great acquisition roadmap when you actually know what your own strategic roadmap is. [...] Microsoft is really trying to figure out what is their long-term strategic roadmap, where do the few things they really want to focus on fall."
Instead, Microsoft is anticipating where markets are moving or creating and acquiring new innovation to support market activity around their strengths. The $26 billion acquisition of LinkedIn is one such example. Microsoft plans to integrate LinkedIn data to make a single source for information about professionals, a powerful sales tool. The deal will help Microsoft compete against Amazon Web Services in the cloud and Salesforce in customer relationship management. These competitive fronts are where Microsoft is already investing, making the acquisition an additive one. Another industry analyst remarks, “The acquisition has fairly strategic rationale of combining Microsoft’s traditional user presence with a business-oriented network, [...] It’s trying to create something rather than being late to the market.”
M&A Lesson Learned: Find ways to add value to existing products, while battling for market share against most your most significant customers.
Although they deploy strategies uniquely, these companies are strengthening their competitive positions using M&A. General business opportunity will always drive some level of investment activity as cash-rich companies use M&A as a tool for portfolio expansion, to kill competition or acquire new customer segments. But in having a clear demarcation of corporate strategy and outcomes, M&A becomes a driving force of value creation that keeps these companies at the forefront of industry leadership.
Building a Practical Framework for Strategic Assessment
Peter Zink Secher, author of the M&A Formula, remarks that “half of M&A success is in the deals you don’t do.”
While loss from poor deal making cannot be fully avoided, maximizing value and achieving repeatable success starts by understanding business model fit. This is conceptually the same as the application of strategic rationale seen in the tech-giant M&A activity above. And for companies not named Facebook or Google and without billions of dollars in excess capital sitting on the balance sheet – a clear framework for target validation and deal review is particularly critical.
Companies need to learn to say ‘no,’ so they are better prepared to say ‘yes’ at the right time. But saying “no” is particularly difficult when review is highly subjective and guiding strategic principles are undefined. Determining which targets warrant further review cannot be subjective. Instead the decision making must build from a systematic and repeatable approach tied to an overarching strategic view.