Thursday, March 12, 2015

Why do large companies acquire startups and just let them die? Is there value in acquisitions to eliminate competition?

It is interesting idea blogged by Michael Wolfe on

People who haven't been inside the meat grinder of a large company scratch their heads understanding the madness.  A few things to remember about big companies when it comes to M&A:
They often can't execute - many startup acquisitions just aren't executed well.   Look at the long list of other things that big companies do not execute well, many of which are actually in their core markets and core competencies.  It is not surprising that a new product, new market is even harder to get right.Big companies are big - a deal that may seem to be large to you ("my friend's company was acquired for $30M!") is a rounding error.  It may not get much attention.  It may have been a little experiment led by a single manager in a single group.  Not something the company is putting cycles into.They are not monolithic - one small faction at the company does the acquisition.  Other groups don't understand it or even compete with it (Why did Delicious fail?)  After a reorg or layoff, it just dies.  A couple of years after my last acquisition, I was still bumping into high level people around the company who barely knew who we were or what we did or why the deal happened.Acquisitions are about risk management:  startups are risky, but acquiring a startup and trying to integrate it are also very risky.   Good acquirers know this and know that if only 50% or even 25% of their acquisitions are a success those may pay for the losers.  Similar mindset to a venture portfolio.  Someone at Cisco described this to me once...they look for a certain % "hit rate" on their deals.  They manage a portfolio and occasionally divest or shut down the losers.They change strategy - a deal that made strategic sense last year suddenly is out of place with the new strategy, so the acquisition is stranded.They can only do a limited number of deals, especially large ones.  Managers put their favorite deals forward and lobby corporate development to put theirs at the top of the queue.  To win over their rivals they may need to either 1-put unrealistic top line numbers in the business plan or 2-agree to crushing expense cuts to make the math work.  They end up missing their numbers, the manager either gets fired or, more likely, moves onto to another group, "passing the trash" to a new manager who never would have agreed to the numbers in the first place.Budget cycles are the life blood of large companies - a manager does an acquisition with grand plans.  In the next cycle she loses a big chunk of her budget (especially in downturns or dying companies, er, Yahoo).  Whoops.  She starves the acquiree since her bonus check comes from making the number in her more mature businesses.The acquirer may not want today's business - they may want to shut it down, take some pieces, then launch something new (Apple with Lala, hopefully).Acquirers are not always smart about people - they think the acquired business can run even if the management team leaves.  They leave, their followers leave, then...whoops, there is no way to roll back the clock and ever revive the business.Sometimes they do talent acquisitions - Facebook and, for example.And, yes, sometimes they drive consolidations- you buy the company to get market share with an intent to end of life the product.  But this isn't the usual case.Honestly companies get way too much credit that what happens is what they intended to happen.  I love the expression "never assume conspiracy when incompetence will do."

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