Wednesday, July 27, 2016

M&A Missteps and Yahoo's decline

While companies such as Google have built significant value as result of a well-considered mergers and acquisitions strategy, Yahoo seemed to squander value. What role did merger-and-acquisition missteps play in Yahoo’s slow death?

Thursday, June 16, 2016

Can Microsoft Lock-In LinkedIn Value?

For Microsoft’s acquisition of LinkedIn to be successful, integration not only must establish an appropriate starting point (preservation). But even more important is determining the path to the desired objectives and speed on the integration path to symbiosis and realization of revenue synergy.

Friday, August 14, 2015

Is Google/Alphabet the next Berkshire Hathaway?

Will Alphabet (formerly Google) become the Berkshire Hathaway of the 21st century? While some have viewed the comparison as silly, the question deserves further analysis. After all, Larry Page has often expressed his admiration for Berkshire's holding company structure.

Reasonable people will differ in their opinions about the validity of this comparison. While others may concentrate on differences, my emphasis will be on similarities. I'll focus on the M&A activities of the two companies.

Role of M&A in building the companies
Both companies have been voracious acquirers. Since 2010, Berkshire has purchased some 15 companies, while Google has acquired a whopping 125. Of course, many of Google's targets have been small acqui-hires, whereas Berkshire's typical deal is elephant-sized. Indeed, in his 2014  annual letter, Buffett states that he is interested in companies with at least $75 million in pre-tax earnings. Most of Google's acquisitions are far, far away from that number in revenue.

While Buffett has built Berkshire through inorganic growth coming from established companies, Page has developed Google largely through semi-organic growth, which blends existing internal capabilities with acquired external technological talent and resources from developing ventures.

But both companies have become M&A masters, nurturing this form of corporate development into a core strategic capability.

Cash is the fuel for M&A

For both Berkshire  and Google, cash generated from highly successful core operations has been the fuel for M&A. For Berkshire, the cash float from insurance has been a major support. For Google, the fuel has come from rapidly growing high-margin advertising revenue.

Both companies have shunned the use of stock in acquisitions. Buffett has famously declared that he and Charlie Munger would rather prepare for a colonoscopy that use Berkshire stock in a transaction. There have been few exceptions, with Burlington Northern being prominent. Google has used stock in only four major acquisitions, Applied Semantics, YouTube, On2, and AdMob.

M&A integration styles

Berkshire and Google are both obsessed with perfecting M&A integration. For Berkshire, this has largely meant becoming excellent at the art of preservation, allowing great management to continue running companies post-acquisition. For Google, integration has become an artful science with the goal of achieving an alchemic blend of existing and newly acquired talent and technology.

Bottom line on Alphabet mirroring Berkshire Hathaway? Page states that Alphabet can be parsed into alpha-bet, with alpha signaling returns above benchmark. While Page has not emphasized the "bet" piece of the parse, it's clear that what Alphabet is attempting is riskier than what Berkshire does.

It's taken Berkshire Hathaway about 50 years to grow into a $350 billion market cap company. Google has reached $450 billion mark in some 15 years.

I like the alpha bet that Alphabet will become the world's first trillion dollar market cap company over the next five years.

Sunday, July 26, 2015

Driverless cars as a service: $16B+ for Google?

This past Friday four UCLA Anderson EDGE student teams competed in a case competition involving the future of autonomous vehicles (AVs). Teams were assigned to Google, Mercedes-Benz, Tesla, or Uber and were tasked with how each company should innovate in order to enhance its position in the battleground for the future of the automobile.

The Google team won, recommending that Google should enter the AVaaS (autonomous vehicles as a service) market. The team estimated that this initiative (which they code named GOOSE) could yield $16 billion in direct, transportation-related annual revenue for Google starting in the year 2020. The team assumed pricing for on-demand car services would fall by 50%, given that the "driver dude" would no longer be needed. (Of course, this analysis assumed that regulatory and other issues can be resolved.) In addition, the team estimated that Google could earn up to $7 billion in additional advertising related to this service.

The team argued that Google should "go to war" against Uber and become the leader in next-generation on-demand vehicle services. This possibility of  this battle has been widely reported on in the press. For example, in February, Business Week reported that Google was developing its own Uber competitor. Google was coy about its future plans, tweeting "we think you will find that Uber and Lyft work quite well. We use them all the time."

In 2013, Google Ventures (GV) invested $258 million in Uber at a reported post-money valuation of $3.8 billion. Since GV operates largely independently of Google with a prime directive of generating capital gains, it's not unheard of for GV to invest in potential competitors of its parent.

Uber, given the possibility of having to go head-to-head with Google, has not stood still. In March, Uber acquired DeCarta, a map-tech company. Then in May, Uber lured 40+ robotics researchers away from Carnegie Mellon University to significantly enhance the capabilities of its own robotics research center in Pittsburgh.

If the EDGE team is correct in estimating this market opportunity for Google, fasten your driverless seat belts.

Tuesday, July 7, 2015

Will Twitter's acquisitions in 2015 turn the company?

Twitter may be changing its CEO, but the company's M&A machine has certainly not been stuck in neutral. Our infographic depicts six acquisitions the company has made during the first half of 2015.

Overall, Twitter's acquisitions are continuing to move away from acquiring companies that build the core social network to companies that support monetization efforts. Consider some examples.
  • In January, Twitter acquired Periscope, which allows users to upload live video wherever they are and broadcast it for followers to watch. The consideration was estimated at less than $100 million in cash and stock, but skewed towards cash. The acquisition reflects Twitter’s move to bolster its video capabilities. Adding the ability to stream live video on Twitter capitalizes on the company’s strengths as a real-time broadcast service. This fall, Twitter plans to launch Project Lightning, which will provide special live event coverage for both Twitter users and non-users.
  • In April, Twitter acquired TellApart, which helps retailers leverage data by personalizing the customer experience and drive omni-channel commerce. According to an SEC filing the consideration was $533 million in stock. TellApart's integrated suite of marketing solutions has allowed marketers to deliver personalized messages in real-time across platforms such as display ads, Facebook, and email.
  • In June, Twitter acquired Whetlab, which develops technologies for machine learning, a branch of artificial intelligence that utilizes algorithms to detect patterns in big data and to make recommendations and predictions. Possible uses of Whetlab technology by Twitter include: 1) improving a user's tweet timeline; 2) enhancing the company's ability to target ads; 3) licensing data. While Google has information about user's search and Facebook has information about what people are doing, Twitter's cache of data is distinctive in capturing what "influencers" are thinking. Whetlab could help Twitter pattern such data into trends that are of high value to both consumers and businesses.
M&A success is about sound strategy, valid valuation, and intelligent integration. Twitter appears to have delivered on the first two elements. Let's see if it can pull off the third.

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.