Tech Mergers Can Be Washouts
Mergers can often be washouts, benefiting neither the company that is acquired, nor its customers. In technology companies innovation and entrepreneurship often suffer with such change in ownership. So why are the giant technology companies increasingly gobbling up the smaller, more efficient, highly service oriented and innovative tech firms each day?
1) The big company has a surplus cash flow and good profits. The management has to find projects that are already mature and can contribute quickly to the company growth and shareholder wealth.In such cases acquisitions are often done to match competitor strength.
2) The big company is anticipating competition from an innovative but small competitor who has a winner on its hands, and is hence acquired. If its product line cannot be trashed upfront, it is considerably slowed down and phased out over the years.
3) A VC firm that wishes to exit with high profits approaches the big company with a profitable acquisition after convincing the smaller company that his project would lose steam, unless it strikes a deal with a bigger partner.
Among the top 5 technology M&A deals in the world in the recent past are the $7.4 billion Oracle-Sun deal, followed by the $3.9 billion Dell-Perot merger and Cisco's $ 3.4 billion acquisition of Tandberg, plus its $2.9 billion deal with Starent Network and H.P’s $2.9 billion buyout of 3 Com. Apart from the Cisco deals there is little real synergy between the merging companies.
Cash-flush Oracle bought the struggling Sun Microsystems after several other suitors were rejected. The merger has still not been completed due to monopoly concerns raised by European regulators who fear that consumers could be adversely affected.
The Dell-Perot deal was done because Dell wanted to match H.P.’s acquisition of EDS in 2009, while HP bought 3Com to match Cisco’s growing clout in the switching devices market.
The biggest in the M&A business is undoubtedly IBM, which takes over 5 to 10 business each year, often to kill off competition from nifty and innovative rivals that have cut into Big Blue’s bulk business.
HP did however turnaround its fortunes by dropping CEO Carly Fiorina, the architect of the HP/Compaq merger, after 3 years of non-performance. She was replaced with Mark Hurd, who has managed to revitalize the giant corporation. Still, there were losers among customers, product lines, and the acquired companies and their innovative employees.
Why? Because the big companies are often neither innovative nor efficient enough to make best use of the assets they acquire.
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