Do Big Tech Acquisitions Ever Work Out?

from the destruction-of-value dept

With the positively yawn-inducing news over the weekend that Yahoo had rejected yet another offer from Microsoft, Joel West is reminding people that big acquisitions almost never make sense and very often destroy value. As an example, he points to the news that AMD is writing down $880 million on its acquisition of ATI only 8 months after it already wrote down $1.6 billion. That's $2.5 billion wiped out in a very short period of time. As West notes, small acquisitions can make sense for small companies, at least in allowing their founders to cash out -- but for big companies it's usually more about ego: helping them move up the Fortune 500. But those deals almost never work out:
The fundamental problem of acquiring public companies is that you have to pay more than the market price -- so the claim is either you know better than the market (never true) or that you will realize synergies that increase the value of the acquired company (almost never true). So the choice is between buying overpriced good companies, or troubled companies not worth buying at any price. Acquiring a troubled company means you acquire their troubles -- whether it's exposure to an industry past its peak (AOL Time Warner, Viacom-Blockbuster) or a company with a justifiably lousy market position (Daimler Chrysler).
The other aspect that he doesn't touch on is that with big companies, there are always investment bankers crawling all over management trying to convince them to buy up other companies one week, and sell off pieces the next. This "buy 'em up, sell 'em off" strategy almost never works for anyone but the investment bankers who take their fees both coming and going. So as the silly battle continues around Microsoft and Yahoo, rest assure that pretty much whatever happens, you can expect to see a destruction in value rather than any "synergies" revealed.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Flyfish, Jul 14th, 2008 @ 5:23am

    Of course they do

    Compaq ate DEC, HP ate Compaq. HP is still trying to figure out how to leverage everything they got from DEC. In 10 years it's likely that there will only be 3 significant computer manufacturers, IBM, HP and Dell. Sun, if they survive at all, will likely still be trying to make money off the Java that McNealy almost rejected.

     

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  2.  
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    Doug (profile), Jul 14th, 2008 @ 5:29am

    One day too late

    Well this article was written one day too late for Belgian brewer InBev who acquired Anheuser-Busch yesterday. http://www.nytimes.com/2008/07/15/business/worldbusiness/15inbev.html?ref=worldbusines s

     

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  3.  
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    JBB, Jul 14th, 2008 @ 5:44am

    Oracle buying the company I work for isn't working out so well for me, anyway...

     

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  4.  
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    Lu-Tze, Jul 14th, 2008 @ 7:18am

    While there was several bad takeovers, there are also many good takeovers. It is very lame to cite anecdotal evidence to conclude most or all takeovers are bad. There have been many examples of increased sales/revenues (e.g. Procter & Gamble takeover of Gillette), economies of scale/increased marketshare (e.g. Mittal's takeover of Arcelor and most likely the InBev's takeover of Anheuser-Busch). On the latter which another comment refers to - it is worth noting that almost all economists agree that InBev's takeover would be good for both companies the naysayers are mostly people worried about layoffs (which is a real concern but not bad economics as a whole) and jingoists (which as always has little or nothing to do with economics). So both their POV do not reflect the economic merits of the takeover.

    The article's worst point is saved for last when he writes off all of GE growth by diversification because it has one setback right now.

    Again the rejection of Microsoft's offer by Yahoo was more visceral and had little to do with the actual economic merits of the deal, anyway.

     

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  5.  
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    Ima Fish, Jul 14th, 2008 @ 7:23am

    Re:

    Mittal's takeover of Arcelor and most likely the InBev's takeover of Anheuser-Busch

    God, learn to read. The article asked whether big tech acquisitions ever work out. Instead of overing examples of tech acquisitions that worked out, you offered two non-tech acquisitions.

     

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  6.  
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    Kevin, Jul 14th, 2008 @ 7:25am

    AMD/ATI is a bad example

    The reason why the AMD/ATI merger is a bad example is that it usually takes between 4-6 years for a processor to go from concept to design to production to the first finished product. You're not going to see any of the fruits of the merger (outside of consolidation in the HR and Accounting departments) for a couple of years yet.

    The rationale behind the merger was to allow AMD to continue to compete with Intel by integrating GPU functionality into their CPU cores, and those products are still a couple of years out. Intel is also working on those products, and their version is also a couple of years out. While AMD is definitely taking a financial hit today from the merger, without the merger they would essentially be out of business in 3-5 years.

     

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  7.  
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    Anonymous Coward, Jul 14th, 2008 @ 7:49am

    Lee Iacoca

    Lee Iacoca in his last book, "Where have The Leaders Gone" touched on this same subject.

    Lee made the observation that most mergers failed to have == same marketshare. He said it made the most sense not to participate in such large mergers.

     

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  8.  
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    Michael Vilain, Jul 14th, 2008 @ 9:15am

    Same thing happened to a friend...

    Not really a "clash of the titans" but more a clash of cultures which is highly likely with Microsoft and Yahoo (what's left of it), but a friend's company was acquired by Aligent. Aligent thought they were getting a core company that they could use to create a bio-informatics division. The problem is that Aligent is primarily a _hardware_ company and my friend worked at a genomics analysis company. They were the leader in the field, doing what startups do--lots with very little and doing it very well. Aligent was the hardware side of HP--all their non-consumer products sans printers and computers.

    But the person who brokered the sale was shuffled off to another part of Aligent after the founder decided to leave and go raise a child. So there was no internal advocate to speak for these newly acquired drones into the Aligent collective. And the IT transition was very painful. Rather than have the sysadmin restart a server, they had to call IT services in India and go through multiple layers to find _someone_ in the States who knew how to reboot the Linux license server. It's bad when customers can't use your product for several days because you can't find someone who knows how to reboot a server.

    What killed product and the group was Aligent's empire building culture of influence rather than "let's get a product out and help customers". I don't see Yahoo and Microsoft getting along any better. When ASK/Ingres software got acquired by Computer Associates back in the 90's, 99% of the 250 engineers packed their desks and left the building the day of the announcement and found jobs within HOURS. Wouldn't it be a kick if all Microsoft got out of this merger was a bunch of buildings and huge pile of 9 track tapes?

     

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  9.  
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    Lu-Tze, Jul 14th, 2008 @ 9:37am

    @ Ima Fish

    I cited non-tech examples because (a) the InBev takeover was mentioned by another comment and I was responding to that. (b) the article refers to GE's diversification problems and most of its current woes are in the financial sector and not in the technology sector, therefore I responded in kind.

    Plus the reasons he gives why mergers never work "you can't beat the market" and "you seldom realize synergies" are not technology-specific arguments. Anyway, the first point is directly contradicted his analyses of GE where he claims investors are working on blind faith. If this is true, you can easily beat the market if the takeover were friendly (not unsolicited like Microsoft/Yahoo) - because you can get more information than the market.

    The lopsided view in the article is also apparent when it cites Sprint/Nextel without mention the the many successful mergers that has re-created AT&T with near monopoly in many, many areas.

    Finally, the reason it is difficult to find successful mega-tech mergers is because most of the old ones are marred by the dot-com bubble (e.g. AOL fiasco) and most of the new ones are either too new (e.g. AMD-ATI). For the record, the AMD-ATI merger is an obvious example where pre-merger talks could have revealed future product plans that were not known to the public and therefore you could beat the market. And as another comment mentions the supposed products of this merger are still two years out. Please note I am only including the mega-tech mergers here. There are many smaller mergers that even the author acknowledges work. e.g. for Cisco or EMC.

     

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  10.  
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    John Wilson, Jul 14th, 2008 @ 10:28am

    Re:

    Your three examples don't work here as none of them involve tech companies and, more importantly, each of the takeovers you cite are about larger companies already in the business the smaller one was taking over similar businesses.

    Tech mergers, by and large, don't fit into this.

    With specific reference to Yahoo Microsoft's hostile takeover bid is about Microsoft trying to buy its way into search and ads after having failed miserably itself in that field. Yahoo isn't doing all that much better either.

    Google is the elephant in the room there that both MS and Yahoo are having so much trouble competing with.

    Notably as well, the companies have divergent cultures which make any takeover, particularly a hostile one, problematic if not impossible.

    While what Microsoft is attempting has worked frequently in the past for them this time they're not acquiring a minnow but rather a larger arguably very ill fish.

    Acceptance or rejection of hostile takeovers is most often visceral in any event.

    That said the economics and syngergies of the proposed takeover still don't make sense.

    The price makes sense to Ichan which still doesn't make it a good deal. He's a slash and burn investor anyway so I'm pretty sure he doesn't give a damn as long as he walks away with more money in his pocket.

    ttfn

    John

     

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  11.  
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    Lawrence D'Oliveiro, Jul 14th, 2008 @ 5:25pm

    Who said "you can't beat the market"?

    We are the market.

     

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