November 05, 2016      

The tech deals were a failure. That’s what we learned in September about Intel’s acquisition of antivirus software maker McAfee five years ago. The semiconductor giant agreed to sell a majority stake in its $7.7 billion acquisition to a private equity firm at a price that showed that McAfee’s assets had increased only marginally, if at all.

There is an important message for the robotics industry here.

Far too many technology companies are doing a poor job pursuing acquisitions. Strategic planning is insufficient, and integration is largely bungled. Companies usually value acquisitions based on project potential and end up overpaying when that “potential” fails to materialize.

One technology company should acquire another only if the acquisition is highly likely to enable or enhance growth prospects indefinitely. Acquirers sometimes say this will be accomplished, but it usually turns out to be a pipe dream.

Most experts say the failure rate of acquisitions is at least 50 percent. Harvard Business Review has estimated it to be 70 percent to 90 percent.

It’s not as though companies decide to pursue tech deals out of thin air. Their motivation is usually reasonable.

Companies may turn to mergers and acquisitions to embrace an emerging market opportunity or, concerned about their deteriorating competitive position, to reinvigorate themselves.

In other cases, a company may decide that it is better to buy new technology than to make it or that it needs an outside company under its wings to enhance its domain expertise. Some M&As are sparked by several of these factors.

Too often, however, the strategy is flawed, and key tactical steps miss the mark. Companies put on blinders and conclude that a particular tech deal will somehow buck the negative historical trend.

More often, the result is that the wrong companies are purchased for ultimately an unrealistic reason, and deals are improperly priced. If the marriage doesn’t fail outright, the financial performance of the acquirer declines.

Why tech deals fail

Even if the right acquisition is made, lots of things can go wrong. Corporate cultures clash. Or too much attention is focused on tactics and too little on strategy.

A 3D printed logo of Microsoft is seen in front of a displayed LinkedIn logo in this illustration taken June 13, 2016. REUTERS/Dado Ruvic/Illustration TPX IMAGES OF THE DAY

In the case of startups, employees may be unwilling to swap the dream of becoming a key player for merely being a cog in a corporate wheel. They don’t buy into the tech deal and depart.

Consider another recent acquisition that looked shaky from the get-go. This past summer, Microsoft’s purchased LinkedIn for more than $26 billion, almost 50 percent more than the value of LinkedIn’s stock.

Synergy is lacking. Small wonder, given that Microsoft’s M&A track record is weak. It has written down multibillion-dollar purchases of the Nokia handset business and the aQuantive advertising business. And its $8.5 billion purchase of Skype is widely viewed as disappointing.

In many cases, mergers and acquisitions don’t flat-out fail. They just underperform.

Russell 3000 companies that made significant acquisitions generally had worse post-deal returns than their peers, according to an analysis last month by the S&P Global Market Intelligence team. Profit margins, earnings growth and return on capital all declined, relatively speaking, while interest expense rose as debt soared.

The three most common M&A mistakes

So what happens most often to undermine tech deals?

  1. Integration is weak. The business development executives who find companies and negotiate strategic partnerships are not the executives who actually manage the acquisition or integrate the target company. Most of the time, the chief technology officer or operating executive who wanted the acquisition is the person who determines the fate of the startup.

    Success often depends on whether the acquiring company wants to keep the new company as a standalone division or integrate it into the corporation. Standalone divisions tend to have a better shot at success. However, companies are typically bought for their intellectual property, so the usual plan is to integrate the company and quickly assimilate it.

  1. Executives fail to distinguish between tech deals that might improve current operations from those that could dramatically grow the company. Companies then pay the wrong price and integrate the acquisition poorly. A deal designed to boost performance is generally insufficient to significantly change a company’s growth trajectory. Doing both would require something that’s seldom done — working to integrate the acquisition in accordance with its business model.

    Business models are multifaceted, but their most important components are the resources used to deliver customer value, such as employees and products. In an ideal case, these resources can be extracted from an acquired company and plugged into the parent’s business model. The problem is that other parts of the business model — such as the profit formula and processes like manufacturing, R&D, and sales — are embedded and generally not transferable.

  1. Acquisitions don’t have a specific mission and targeted goals. Much more typical is the Microsoft acquisition of LinkedIn, in which one enterprise simply hopes to improve its bottom line by scooping up a new business.

M&As that have worked

It’s not impossible for corporate combinations to work. Some have.

One example is Apple’s purchase of chip designer P.A. Semi in 2008. Before then, Apple procured its microprocessors from independent suppliers. But as competition with other smartphone companies increased the importance of battery life, it became imperative for Apple to optimize power consumption by designing processors specifically for its products.

Apple had to purchase the technology and talent to develop an in-house chip-design capability. Predictably, the combination fared well.

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Another successful example was EMC’s acquisition of VMware in 2003. EMC manufactures storage hardware, and its marriage with VMware substantially strengthened its reach into its customers’ data centers. This merger turned out to be a stunning success.

The bottom line is that executives need to become far more discerning in eyeing potential acquisitions. This is precisely why, the Walt Disney Co., and Google parent Alphabet recently took a hard look at acquiring Twitter and, in each case, walked away.

Editor’s note: This column was originally published in Venture Capital Journal.