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.

Filed Under: acquistions, mergers, synergies
Companies: amd, ati, microsoft, yahoo

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  1. identicon
    Lu-Tze, 14 Jul 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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