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
    Kevin, 14 Jul 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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