Source: Nick Petri, OpenView Partners
Forecasting acquisitions in the technology world is an inexact science. And that’s putting it nicely.
Occasionally they make sense, like when Amazon purchased Kiva Systems in order to absorb a technology they already used extensively in their warehouses.
But acquisitions are rarely so obvious. The bulge-bracket technology companies that do most of the acquiring often seem to be playing pin the tail on the donkey in their acquisition strategy, without rhyme or reason to anyone outside their four walls. This can be extremely frustrating for an entrepreneur or VC looking to sell their company.
That doesn’t mean all is lost. A deeper dive into recent M&A activity reveals common themes that shed light onto the rationale of big companies looking to make acquisitions:
1) The biggest enemy of your biggest enemy is your biggest friend
Taken out of context, Microsoft’s acquisition of Yammer in June 2012 may have seemed like throwing darts at a board. They hadn’t been very active in the social space, and Yammer had almost nothing to do with Microsoft’s core products: Windows and Office.
It did, however, make a great deal of sense in the context of Yammer’s competitive marketplace. Yammer’s biggest competitor, Salesforce Chatter, is a major differentiator driving Salesforce’s domination of rival CRMs. For Yammer, by targeting their biggest competitor (Salesforce’s) biggest competitor, MS Dynamics, Yammer was able to find a partner who badly needed their technology for competitive purposes.
2) New entrants prefer to buy rather than build
The aforementioned Microsoft made a different type of acquisition in 2008 when they bought flight cost predictor Farecast for about $100m. Unlike Yammer, the acquisition wasn’t in direct response to a competitive threat. Rather, they were getting ready to launch Bing and knew they needed to make a splash to get entrenched Googlers to give them a chance. Since their developers’ hands were probably full building the core Bing product, the idea of buying a side feature that can differentiate their product was especially attractive.
3) Businesses in transition are always looking for a boost
Similarly, old-guard businesses looking to redefine themselves are often willing to part with resources for the right acquisition. Dell wasn’t exactly a new entrant into the enterprise software space, but their well deserved reputation as primarily a hardware company has made it difficult for them to catch up in the software space organically. Their combination of inadequate in-house development resources, a large pile of cash, and a sense of urgency to show their shareholders progress towards a new Dell, all contributed to their purchase of Quest Software in July of 2012.
4) Public companies love playing musical chairs
One week after Dell’s acquisition of Quest, Oracle made news with another acquisition, this one of Involver, a SaaS social media manager. Hot on the heels of Vitrue’s acquisition, also by Oracle, and Buddy Media’s by Salesforce, the game of musical chairs in that industry had officially begun. It wasn’t long before Google followed suit with its acquisition of Wildfire.
Big public companies, by nature, are extremely conservative in their decision-making. No executive wants to be the only one of his or her peers that missed out on a big trend or new technology. This can work against you if your company is in a quiet space, but it can also work in your favor when the music starts in your space. Pay close attention to who is buying your competitors, and when activity starts accelerating, find the company without a seat.
Will you ever be able to completely understand the acquisition strategy at a big public tech company? Of course not. Like a complex weather pattern, the politics behind these decisions get exponentially more difficult to project the further out.
But that doesn’t mean it’s a fruitless exercise to think about the different reasons a larger company might want to purchase yours. Hopefully, these four angles will serve as a valuable starting point to build your list of potential acquirers.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.