Unless you are Cisco, Oracle or a handful of other companies such as a telco, you will have a tough time making tech/communications acquisitions work. That is my advice after watching the past decades. Perhaps the most sobering evidence is Nortel's Alteon deal which the company paid $7.8 billion for in 2000. The products are being spun off to Radware for -- get this, $17.65 million.
Nortel lost a staggering 99.88% on this acquisition which reinforces the fact that unless you know what you are doing - and in tech most of time you don't, you are better off not acquiring.
As I researched an old article on the acquisition I couldn't help but be horrified by how things have changed over the decade.
Take a look at an excerpt:
In a mid-morning conference call, executives at the companies contended that Friday morning's selloff was not related to the deal, pointing instead to overall "market volatility" and adding that other technology stocks were down as well.
Under the agreement, Nortel will offer Alteon shareholders 1.83148 Nortel shares for each Alteon share. The estimated $7.8 billion purchase price is based on Thursday's closing price of $144 a share for Alteon, and $78.625 for Nortel shares so represents no premium.
Dominic Orr, president and chief executive of Alteon, said the two companies "share a common vision of high performance content delivery services that exploit the high-performance Internet and create new profit opportunities for service providers."
He added that the merger would greatly expand both companies' reach and give them a leading edge in capturing market share in switching technology.
Can you imagine if Nortel had used these funds on marketing its core products instead of this purchase? Even if they spent a tenth of this amount on additional marketing they would have been in a great position today.
I don't want to beat the Canadian telecom company up too much as everyone it seemed was making billion-dollar acquisitions in the heyday of the dotcom boom and similar to the banking industry, it seemed you had to do this to be in the game.
If there is one thing we are learning now is if you overextended yourself in the past, you will likely not make it through this downturn. I am aware of a number of highly-leveraged communications and contact center companies which are struggling with massive debt payments which were incurred when making acquisitions.
Sadly, we will see many good people in large companies bolstered by acquisitions lose jobs as a result of this downturn and I would imagine the market will learn to make less frivolous acquisitions in the future. This is probably a good thing.
But I just can't help but wonder why Cisco and Oracle are so good at integrating new companies and others are terrible at it. From what I have heard, Cisco has a playbook for acquisitions and integration which most other companies do not have. They replace company signs with the Cisco logo as soon as the acquisition is announced for example. Other companies take months to do this.
Acquisitions for Cisco are another important core competency and they see this as an important part of their growth. It seems most other companies consider acquisitions as an afterthought. I think we now have even more evidence that the afterthought model doesn't work too well.
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Rich,
You are touching on a very important point especially considering the current state of the economy. Should a company acquire much needed growth through increased spending on marketing and R&D / improved product and services or should through acquisitions of smaller companies? As you pointed out it comes down the actual implementation influenced by the existing people and processes and of course the power of the buyer's brand name... (this assumes a "reasonable" purchase price.)
In this market it is very tempting to consider acquisitions and forget that any "bargain" could end up an "expensive proposition" in the long run if the not implemented correctly.
Any declarative statement is wrong and I made one and I am wrong. As you suggest, a smaller acquisition in the $10-$20 million range to acquire important technology is a different story. And these numbers are guidelines as today’s stock market the valuations are too low to use market cap as a guide.
So I suppose the next thing to look at is the integration effort. Will you need to integrate 500 people? Will there be significant overlap? Do you have the skills in place to ensure the integration will run smoothly?
From 1998-2000 I remember communications companies got so big, so fast that when I asked one person in the company who handled another area, they didn’t know and couldn’t find out themselves. If that wasn’t a sign of a bubble, I didn’t know what was. Of course we realize these things in hindsight.
You would imagine the best example of an acquisition which was a no-brainer was Google buying the three-person AJAX-based word processing firm Writely. It was three people – you really have to try to screw that up. But then again Grand Central was a small acquisition by Google and this one went pretty poorly.
So really there seem to be few rules to whether an acquisition will be successful but when Oracle or Cisco make one they seem to have the best chances. And this really puts these two companies at a competitive advantage. Nortel’s demise can partially be attributed to trying to keep up with Cisco but not having the ability to integrate well.
Rich, I believe you hit on a key reason why Nortel is struggling right now. Their core competency is making the technology not buying it. Hopefully through the restructuring process they will spend part of their 2.3 billion to improve it.
Agreed... Thank you for expanding on the issue Rich. Most significant acquisitions, whether for technology reasons or growth, require complex research, analysis and implementation processes. Few company teams have the right talent to pull off a series of successful acquisitions. Oracle and Cisco seem to have “the right ingredients” and that is one reason they are at the top.