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.

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