Saturday, June 20, 2015

Apple and Google algorithm for acquisition goodwill

When a company makes an acquisition it must identify and value the assets of the target and allocate net purchase price to these assets. If net purchase price exceeds identifiable net assets the balance is assigned to goodwill.

Now consider Apple and Google acquisitions over the past two years, for which these companies disclosed specific purchase price and associated goodwill.
  • Apple acquires Beats (music streaming): purchase price = $2.6 billion; goodwill = $2.2 billion. Goodwill percentage of purchase price = 85%
  • Google acquires Waze (crowd-source traffic information): purchase price = $969 million; goodwill = $841 million. Goodwill percentage = 87%
  • Google acquires Nest Labs (smarthome devices): purchase price = $2.6 billion; goodwill = $2.3 billion. Goodwill percentage = 88%
  • Google acquires Dropcam (smarthome monitoring): purchase price = $515 million; goodwill = $452 million. Goodwill percentage = 87%
  • Google acquires Skybox (nano-satellites): purchase price = $478 million; goodwill = $388 million. Goodwill percentage = 81%
No need to hire a Duff & Phelps or Houlihan Lokey. Looks like the algorithm is simple: goodwill allocation percentage must be a two-digit number staring with an 8!

Saturday, June 13, 2015

Innovation fuel: M&A or R&D?

One measure that indicates the extent to which a company intends to innovate internally or externally is the ratio of acquisition investments to R&D expenditure. Let's call this M&A/R&D.

During 2013, Apple's M&A expenditures were $496 million, while R&D amounted to $4,475 million. Thus M&A/R&D was 11.1%. In 2014 with the acquisition of Beats (eventually booked as a $2.6 billion cash acquisition), total M&A dramatically increased to $3,557 million. R&D expenditures were $6,041 million. And M&A/R&D mushroomed to 58.9%.

Consider Google. During 2013, the company purchased Waze for consideration of $969 million. Total acquisitions for the year added up to $1,458 million, and R&D amounted to $7,137 million. Hence Google's M&A/R&D for the year equaled 20.4%. Then (as was the case with Apple, M&A accelerated in 2014, with acquisitions that included Nest ($2.6 B), Dropcam ($517 M), Skybox ($478 M). Total acquisition investments summed to $5,061 million, while R&D grew to $9,832 million. For this year M&A/R&D was 51.5%.

Three takeaways.

1) The M&A/R&D ratio is hardly stable. In particular, it's highly sensitive to years in which large deals take place.

2) Much of present and future R&D can be related to past M&A. So the impact of M&A on innovation efforts may be understated.

3) For technology companies such as Apple and Google, the trend for M&A to fuel a large part of company innovation is likely to persist.

Tuesday, June 9, 2015

Twitter's acquisitions point to monetization

So far in 2015, Twitter's acquisitions are moving away from buying companies that build the core social network to companies that support monetization efforts and build MAUs (monthly average users).

Not a completely new strategy, but the corporate business development direction has become more clearly tuned to top-line growth.

The monetization potential for Periscope, a mobile live-streaming app that lets users shoot and broadcast video to followers in real time, is particularly promising.

See our infographic depicting Twitter's 2015 acquisitions at

Saturday, June 6, 2015

Apple creating augmented reality ecosystem via M&A

The time has come for power tech companies to build augmented reality (AR) ecosystems. Augmented reality involves overlaying digital media and information on the real world. Think pointing a smartphone at a restaurant from a distance and automatically seeing its menu and Yelp ratings appear on your screen.

Google's Glass, much maligned but certain to re-surface with improved design, is a prominent instantiation of the technology,

Apple's recent M&A activity signals a ramp up of its own AR ecosystem.

Organizational ecosystems can be built using influence or using control, Taking an influence approach implies emphasizing partnership or minority investment arrangements, whereas control suggests acquisition or majority ownership.

When Apple built its original music ecosystem in the early 2000's, it influenced music labels to license content in order to build the iTunes platform. Now as Apple enhances its augmented reality capability, it is initially using control via M&A to build an AR ecosystem.

Consider three recent Apple acquisitions.

  • In late 2013, Apple acquired PrimeSense, a developer of 3D machine vision technologies for digital devices for an estimated $360 million. PrimeSensor is a system on a chip and a 3D sensing device that can see, track, and react to user movements. The company had worked with Microsoft to develop its successful Kinect motion-sensing gaming/television technology.
  • In April 2015, Apple acquired LinX Imaging for an estimated $20 million. LinX develops miniature cameras for use in tablets and smartphones. The company's cameras capture multiple images simultaneously using proprietary algorithms that can assess depth and create 3-D image maps. The acquisition continued Apple’s pattern of deals in Israel. (PrimeSense was also based in Israel.)
  • Then last month, Apple acquired Metaio, which creates technology that blends real-world imagery and computer-generated elements into video presentations. Metaio's augmented reality technology has been used to develop virtual product showrooms by retailers as well as visual repair manuals for industrial equipment.
M&A ecosystem clusters signal a company's future movement. Apple is clearly intent on throwing its design expertise behind building cool AR products and experiences to show off in upcoming Developers Conferences.

Thursday, May 7, 2015

Robots, start your engines

The Indianapolis 500 automobile race has been a Memorial Day tradition in the United States since 1911, going back almost as far as the last time the Chicago Cubs won the World Series in 1908. (We Cub fans live on in everlasting hope and frustration!) The dramatic starting command of the race is: "Gentlemen, start your engines," which is modified to "Ladies and Gentlemen, ..." when female drivers are in the race.

Could this starting command be further modified for races in the decades to come?

In early 2014, Google acquired DeepMind for a reported $625 million. DeepMind is an artificial intelligence company that builds learning algorithms for applications such as recommendation systems for e-commerce. The company was founded by neuroscientist Demis Hassabis (former chess child prodigy and master gamer), Jaan Tallin (Skype and Kazaa developer), and Shane Legg (researcher).

Google's acqui-hiring of Deepmind helps it compete against other players focusing on deep learning. Facebook has recruited Yann LeCunn (former NYU professor) to head the company's artificial intelligence lab. IBM is investing $1 billion in its Watson supercomputer division that is working on deep learning to support applications such as medical diagnosis. Yahoo acquired the LookFlow team to lead its deep learning initiative. And on it goes.

The field of artificial intelligence (AI) has undergone several cycles of boom and bust since AI was christened and sent out the door with research momentum at The Dartmouth Conference of 1958 organized by Marvin Minsky and others. Periods of buoyant optimism for the technology have given
way to AI winters. But in 2014, an AI spring had returned. Google’s purchase of DeepMind  reflected the new-found confidence in what AI could accomplish in multiple business sectors of interest to Google.

In March 2015, Google's DeepMind team revealed an algorithm that can teach itself from scratch to play early computer games with skill equal to or better than a human. The team eventually plans to work on three-dimensional games. According to Dennis Hassibis: "if this algorithm can race a car in a racing game, then with a few extra tweaks it should be able to drive a [real] racing car,"

Am wondering if DeepMind could start working on a pitching algorithm for the Chicago Cubs. Help us, Dennis Hassibis, you're our only hope.

Tuesday, July 1, 2014

Quest for the perfect playlist

Google has acquired Songza, a music streaming service that develops Android and iOS apps for delivering human-curated music stations based on individual mood and activity. Songza has built data and algorithms that predict what users will enjoy listening to given geography, time of day, weather, or activity -- from sleep to sex.

Google plans to use Songza’s expertise in other products such as Google Play Music and YouTube. The company stated: "We view the Songza acquisition as a way to further enhance our radio feature by adding their expertise on context."

The acquisition reflects the steady heating up of the music platform wars among Google and competitors that include Amazon and Apple. A new era for digital music delivery has dawned and may the best mood win.

Sunday, June 29, 2014

Google's schizophrenia

In a highly controversial 2011 transaction, Google purchased ITA software. ITA offered Internet-based software to the airline industry. The company's products included an airfare pricing management system for airlines and travel distributors as well as a passenger reservation management and departure control system. The deal raised questions how far Google would attempt to go into the online travel business.

Later in 2011, Google launched Flight Search, the first product resulting from its purchase of ITA. Also, Google continued to improve its hotel listing service by including virtual tours as well as pricing information.

As reported by The Economist in "Sun, sea, and Surfing" (June 21. 2014), analysts estimate that some 5% of Google's advertising revenue comes from online travel agents such as Expedia and Priceline. So Google may be reluctant to compete too aggressively in this space.

In 2014, online travel agents were spending some $4 billion in digital advertising. Google perhaps was pondering a lesson from the AOL/Time Warner merger, in which AOL struggled (often unsuccessfully) to harmonize the conflicts that emerged with its advertising partners after it owned competing media and other content as a result of the Time Warner deal.

Google appears to be wrestling with its two minds about becoming a major online travel service. Expedia and Priceline are not without some leverage in helping Google make up its mind.