Understanding Your Exit Options: Identifying Potential Tech Acquirers Part 2

March 8, 2011

If you have been following my blog over the last several weeks, you will recall that I wrote a series of blog posts to help start-up companies identify their best exit options.  This series of posts is titled “Understanding Your Exit Options,” as it is intended to teach start-up companies how to plan their exit strategy early on in their adventure, so that they do not overly complicate or block exit opportunities along the way with IT, cultural, product compatibility, and product positioning decisions.
This post is a continuation of my previous post that laid out an analytical framework to assist start-up companies in identifying potential acquirers and demonstrated how this framework could be used to identify the “Power Acquirers” and the recent acquisition trends in the technology sector.

In this week’s blog post, I will first discuss the most common reasons for corporate M&A activity and then examine the cultural and technology interests of the following “Power Acquirers”:

  1. Google
  2. IBM

Common Business Rationales for M&A Activity:
Corporations generally enter the M&A market for one or more of the following reasons:

  1. To acquire key technologies, intellectual property or licensing (source code, infrastructure, patent, software licensing, etc.)
  2. To acquire key people or a critical team of people (i.e. Steve Jobs in the Apple acquisition of NeXT)
  3. To enter a new market or speed up the process of their go to market strategy (i.e. CVS acquired Caremark to enter the Prescription Benefits Management Industry)
  4. To acquire users (i.e. Verizon’s acquisition of Alltel)
  5. To acquire a brand (i.e. Proctor & Gamble acquiring Gillette)
  6. To expand market share to increase purchasing or selling power
  7. To diffuse an Intellectual Property lawsuit (IBM’s Platform Solutions Inc. purchase to end a Mainframe Anti-Competitive Behavior lawsuit)
  8. To speed up the process of getting a product to market
  9. To eliminate a threatening competitor (i.e. Google buying YouTube (Google Video competitor), Microsoft’s deal with Yahoo (Bing competitor), Intuit buying Mint (QuickBooks competitor)

Review of the Technology “Power Acquirer” Cultural and Technology Interests:

Google:
As demonstrated in my previous blog post, Google has been on a major acquisition spree over the last 2 years. Last year alone, Google acquired 25 companies between January 1 and December 2, 2010. Despite increasing the regularity of its acquisitions, Google has stayed true to its M&A strategy. Over the last 5 years, more than 70% of Google’s acquisitions have focused on technology assets and approximately 25% of its acquisitions have focused on market assets like a user base in a targeted segment. Very few of its acquisitions to date have involved strategic talent acquisitions with the exception of reMail in 2010, and Orion and Measure Map in 2006. Most of Google’s acquisitions have focused on building new revenue streams, as opposed to cutting competing revenue streams.
Google’s acquisitions over the last year have focused on key online technologies in the following areas:

  1. Search
  2. Social media
  3. Advertising, sales and marketing
  4. Data and document management
  5. Web development.

Although approximately 80% of Google’s acquisitions this year targeted the online markets, one could expect that their acquisition activity in the Mobile segment will increase in the next couple of years as Android continues to grow as a Mobile Operating System of choice.

In terms of size, the majority of Google’s acquisitions are targeted at technology assets before they have been fully deployed in the market, so the value of the acquisitions tend to be smaller in size. Most of Google’s acquisitions have had sticker prices under $100M and several of these were attained for much less. Google has at times used its expansion capital for major acquisitions (i.e. ITA, AdMob, DoubleClick and YouTube), but only to acquire key technology and user bases in its main internet markets. Google’s reluctance to go after the big fish at times may be the result of the antitrust scrutiny it faced when acquiring DoubleClick in 2007 or attempting to make a deal for Yahoo!’s search in 2009.

Google generally focuses on technology that complements its own and is easy to integrate into its current portfolio. Culturally, Google is committed to maintaining its reputation as a great place to work, as this is how it avoids having to make strategic talent acquisitions.

IBM:
IBM continues to be a major player in the technology acquisition market, as it has been for the better half of the last century. As I demonstrated in my last post, IBM was the most active acquirer in the tech segment between 2001 and 2010. IBM averaged 16 acquisitions per year during that time frame. In 2010, IBM maintained a very stable acquisition flow. It acquired 14 companies between January 1 and December 2, 2010. The size of IBM’s deals were significantly larger than Google’s deals since IBM tends to target companies that are more developed and have already gained prominence in the market place. A good number of IBM’s deals cross the $100M threshold and in recent years we have seen 2 of its deals cross the $1B threshold, SPSS at $1.2B and Sterling Commerce at $1.4B.
Geographically, IBM tends to focus on companies that will be easy to integrate, which is demonstrated by the fact that 17 of its acquisitions between 2003 and 2010 were with Massachusetts based firms. These acquisitions totaled nearly $10B.

IBM has publicly stated that its business growth strategy is to continue to invest its growth capital in R&D and in the acquisition market place. IBM Senior VP and Group Executive, Steve Mills, recently told CNET that IBM plans to spend $20B on acquisitions during the next five years. He said that this money would primarily be spent on software companies.

IBM’s acquisition strategy has centered on steadily building its business analytics, process analytics, systems management, device management, security and cloud computing software portfolio. IBM also has an interest in Smarter Planet Initiatives, in which it continues to regularly invest.

In terms of IT requirements, IBM is less rigid in its IT integration requirements than some of the other major industry acquirers since it has a history of successful integrations. Culturally, IBM is more conservative and tends to focus on acquiring mature companies with established working cultures.

Next Week’s Post:

In my next blog post, I will continue to break-down the cultural and technology interests of a few other “Power Acquirers” in the tech space.

Marketing Manager, Pricing Strategy

<strong>Brandon Hickie</strong> is Marketing Manager, Pricing Strategy at <a href="https://www.linkedin.com/">LinkedIn</a>. He previously worked at OpenView as Marketing Insights Manager. Prior to OpenView Brandon was an Associate in the competition practice at Charles River Associates where he focused on merger strategy, merger regulatory review, and antitrust litigation.