Tech M&A: Sound Strategy or Blowing Bubbles?

They too were young once. I’m talking of the Googles, Facebooks and Apples of this world, along with their M&A tech sector brethren.

30 April 2014


They too were young once, and in terms of years in existence, are still little more than kids.  I’m talking of the Googles, Facebooks and Apples of this world, along with their tech sector brethren.  They’ve all been on a buying spree, shelling out more money on acquisitions in the first part of this year than at any other time since 2000.  What gives?  Is balance sheet cash burning a hole in their pockets and angering shareholders?  Do they just fancy some new bells and whistles to clip onto their existing products and services?  Or is it, perhaps, something else? With still-fresh memories of creating and capturing new markets and thriving while contemporaries floundered, they know what they have to do to survive in an industry exploding with innovation. The pressure to stay relevant – both in and ahead of the game – is intense.  Speed and strategy in what they buy just might help them do that.  But like kids in the proverbial candy store, where should they look?  How much should they pay? Thank goodness they’ve all got such thick wads of cash.

There may be trouble ahead

Some, while clearing the froth of this frenzy from their windshields, think they’ve spotted trouble lurking not too far ahead down the road.  So much money chasing early stage deals can’t be good; outbidding competitors for add-on acquisitions is wildly distorting valuations.  The feel good effect from those coffers full of cash, from the lofty valuations they enjoy courtesy of the public markets can be, well, intoxicating.  Overpayment for assets is happening every day and shows no sign of letting up and that’s where the real trouble lies.  Inflation.  Inflation of expectations.  Inflation of prices which will eventually spill over into other sectors before oozing into every corner of the economy.  Then things will get ugly.

There’s a tech bubble and bubbles burst.  We’re not there yet and nobody knows where or when that shoe will drop.  In the meantime, entrepreneurs in the valley continue to rub their hands together at the prospect of making big news and big dollars on the sale of an idea, a shot in the dark, a pitch for posterity.  Oculus VR has no marketable product, unproven technology and no revenue but that hasn’t stopped Facebook plonking down $2billion for this bet on the future.  Without so much as buying a bed or a motel, AirBNB’s valuation for its most recent funding round outstrips those of Wyndham Worldwide and Hyatt.  And this reminds me – why is Google buying drone startup Titan Aerospace?

But what are the real risks?

In reality, becoming the next WhatsApp offers you the same odds as winning the lottery.  For every dollar-sign-packed deal headline, there’s a slew of untold stories of entrepreneurs who sold out too early, never realizing the potential reward for their efforts.  And for sure, it’s a two-way street.  The biggest risk to large acquirers is not with overpaying for assets.  It’s with buying startups prematurely, before they’ve got any momentum.  It’s with failing to integrate and nurture new acquisitions effectively, doomed to never realize their purchase price, let alone extract any potential upside in value.

But that’s what tech M&A has always been about, hasn’t it?  Taking that leap of faith to find the next big thing so you can regain your company’s footing. Stay relevant and stay ahead.  That’s why a pot shot acquisition strategy often makes a lot of sense for these tech titans.  When in doubt as to what will be the next big thing, go ahead and buy some small and medium-sized things.  Then wait and see.  Will you overpay?  Give it a few years and we’ll see.  Just make sure you get a plethora of different assets, both the synergistic and the seemingly incompatible, to cover all your bases. Sure, you’ll pay too much for some of them.  As long as it’s not for too many of them. The biggest risk, of course, is standing still.