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!

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.

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 www.trivergence.com/market.asp?MarketID=4208

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.