In the software, semiconductor and networking spaces there are a number of large companies that have made acquiring startups a core part of their business strategy. These companies have developed well honed M&A processes – from evaluation through acquisition to post merger integration. As a result they understand what they are getting and what they can do with it and therefore what they should pay – three important features of any well functioning market. Cisco, IBM, Oracle and HP are perhaps the most active exponents of this strategy.
In the new media space things are not yet that mature. Google, Yahoo!, Microsoft and AOL have all made a decent number of acquisitions and in the evaluation and acquisition phases they do things in largely the same way as the pre-web tech giants, but in the post merger integration phase their track record is much more spotty. I’m not going to name names here other than to point to a previous post about the number of failed acquisitions that Google has made and to say that the others are no better, and often a lot worse.
And, at the risk of stating the obvious, it would be great for everyone in this space if the acquirers of our businesses were more successful with the businesses they acquired. That way they will make more acquisitions in the future, and at higher prices. My fear at the moment is that the poor success rate will lead to a decline in transaction volumes.
These thoughts have been at the back of my mind for some time, and I have long thought that one of the big challenges is the difficulty of ringing out back end synergies when you acquire a new web service.
This post was stimulated by an article on The Register this morning which described a spat between two senior techies from Microsoft and Google. The Microsoft guy was describing the multiple projects they have going to improve the performance of their various web properties and how they were doing different things in different places for different apps – in other words he was describing the patchwork approach they are forced to adopt because they are not running everything on a single platform.
The Google guy (Vijay Gill) responded by pouring scorn on Microsoft, saying they have taken entirely the wrong approach. At Google they force everyone to develop to the same platform (which includes Google’s distributed file system GFS, BigTable its distributed database, and MapReduce its distributed number-crunching platform). Then when they get an improvement in any of the underlying infrastructure all the apps benefit. In other words they get back end synergies across all their apps.
The challenge with this approach is on the people side. Vijay put it like this:
"People are lazy. They say ‘I don’t want to design my applications into this confined space.’ And it is a confined space. So you need a large force of will to get people to do that."
The Google approach makes much more sense to me. The people challenges might be difficult but once you are over them you are sorted. If you take the other approach, and Yahoo! are also in this camp, then you might have an easier time up front with your developers, but you sign yourself up to a lifetime of difficulty as your apps scale.
Moreover, the Google approach reminds me very much of the approach which served Cisco so well during their ascendancy. Like Google Cisco had it’s own proprietary software stack, they called it IOS, short for Internet Operating System, and everything had to be written to it.
Bringing this back to M&A – going back a little way, every acquisition Cisco made was ported to IOS and the cost and expense of doing this was understood prior to a deal getting done, and hence they knew with reasonable certainty that the extent of the synergies they would get (this process was in fact so visible that startups targeting an exit to Cisco would start thinking about how to reduce this cost long before they came to sell themselves). As I have written before it looks like Google is adopting a similar approach. For me this is great, and the more vocal Google is about it the better. That would help them overcome the people challenges at the point of acquisition.
The big picture here is that if Google can get half as good at acquiring businesses as Cisco, and other leading businesses in this space can then copy their best practice, it will be fantastic news for all of us.