Top 10 technology company mergers

By Iain Thomson on Feb 3, 2010 1:41 PM
Filed under Strategy

Big deals that had a big impact.

Just about every month we see some big company snatching up a smaller company. With little to no activity in the IPO space from tech firms, selling to a bigger firm is just about the only way founders and venture capital firms can cash out these days.

Honourable mention: Google/DoubleClick

Iain Thomson: Google's acquisition of DoubleClick kicked off a fight that is still affecting the internet industry today.

DoubleClick is one of those annoying firms who makes its money selling advertising to the likes of you and me. One could argue that without firms like DoubleClick the internet couldn't fund itself, and you'd be right, but the merger raised some interesting issues.

The chief problem was regulatory. Google's acquisition strategy caused all kinds of red lights amongst other technology firms. The biggest name in search getting together with one of the biggest names in advertising raised all kinds of red flags for other companies and before long the regulators were getting bombarded with complaints.

The deal went through but the industry is still watching to see what comes of it. DoubleClick has a reputation that contradicts the Google ethos of 'don't be evil' and the jury is still out on whether Google has reformed the company.

Shaun Nichols: Ten years from now, this one could rank a lot higher on our list.

Google's 2007 acquisition of DoubleClick cost the company US$3.1bn, but also gave it a major presence in the banner ad space. It may not seem like a big deal, until you think about how often you look at banner ads.

The deal was also important because Google makes nearly all of its revenue through ads. Even though it has a gazillion different ventures ranging from Maps to Android to Gmail, Google's bread and butter is still by far its advertising sales. Adding double click brought a potentially huge cash cow in to supplement the company's search ad revenues.

One reflection of just how potentially big the deal is was the amount of regulatory speculation given to the deal. While most acquisitions fly right through, Google's buy of DoubleClick was given an amount of scrutiny normally reserved for mergers between well-known firms.

Honourable mention- Symantec and Veritas

Shaun Nichols: With the 2005 acquisition of Veritas, Symantec made a couple of strong statements.

The first was that it wanted to be more than just a security vendor. The company sent a clear message that it had ambitions of moving beyond just antivirus tools and becoming a larger enterprise security vendor.

The second was that it pictured security as being about more than just blocking attacks. The addition of Veritas meant that Symantec could make security part of a larger enterprise offering. Rather than view security as a separate offering, the company could make security tools a built-in component to other packages.

Iain Thomson: The Symantec/Veritas was interesting for many reasons, and I must admit to watching it expecting failure.

Symantec has grown to the position of world's biggest security software vendor by aggressively expanding its product range and buying up other companies to help it grow. Outgoing chief executive John Thompson was key to this strategy and it has served Symantec well.

But with the Veritas acquisition Symantec really was leaving the cozy world of security and going into new areas that would take it further into new markets. Five years down the line and the company seems to have achieved its goal, although say Symantec and most people still think security.

10. Worldcom/MCI

Iain Thomson: Worldcom has some records to its name, and not all of them good.

In 1997 the merger with MCI was the biggest in corporate history, a US$37bn (A$41.87bn) takeover. Worldcom also planned to merge with Sprint, which would have been another history-making merger. When this was blocked Worldcom made the record books in another way – the biggest bankruptcy in US history.

So what happened? Well, you can sum it up in two words - Bernie Ebbers. Ebbers joined the company in the mid-1980s and leveraged it from a small, no-name provider into one of the giants of the internet age. It took over 60 companies left, right and centre and became one of the hottest properties on Wall Street.

The MCI merger was supposed to be the icing on the cake. In fact it ended up with Ebbers serving 25 years in prison and the company going down the tubes. Worldcom became the biggest financial accounting scandal of all time, as profits were boosted and losses hidden by financial chicanery.

Shaun Nichols: This is why we wanted to make the list about the ten most important mergers rather than the ten best mergers. In many ways the failed mergers are more interesting than the successful ones.

One of the big themes of US economic policy through the 1980s and 1990s was corporate de-regulation. By lifting many of the restrictions on corporate mergers and acquisitions, the Reagan, H.W. Bush and Clinton administrations were all able to spur economic activity.

But when you free up the market you open the door for not only spectacular successes, but also spectacular failures. Worldcom spent much of the 1990s on a telco buying spree and then only stepped things up with the internet boom. Then the bubble popped and they found themselves in the unenviable position of having a large amount of debt to pay in the midst of an economic decline.

As Iain notes, Worldcom's way of dealing with that situation involved billions of dollars worth of fraud, and getting caught meant decades in prison for those who oversaw the operation. In this case, freeing up the market meant giving the company just enough rope to hang themselves.

9. Cisco/Linksys

Shaun Nichols: Though customers likely haven't seen much of a difference, Cisco's 2003 merger with Linksys brought two of the larger names in the business and turned Cisco from a pure enterprise network hardware vendor into a consumer vendor as well.

The companies have kept their old brandings for the most part, but there is no doubt that the move has changed Cisco in particular. The company is now making a serious run into the consumer space and has acquired a number of other firms to fold into the Linksys brand.

Iain Thomson: Cisco as a consumer company? Well to my mind it still hasn't managed it yet.

Cisco pretty much wrote the book on growing through mergers and spent most of the 1990s and beyond snapping up rival companies to become the networking giant you see today, so had to be on the list somewhere. If you are buying networking equipment for your company then Cisco is the name no-one gets fired for buying from.

But the Linksys merger was Cisco's first attempt to get into the consumer market and, to be frank, it hasn't been a great success. Sure, Linksys kit still sells well, but as Linksys product, not as Cisco. A couple of years ago the company started selling kit as 'Linksys by Cisco' but it hasn't helped make Cisco a major consumer brand.

8. Oracle/Sun

Iain Thomson: OK, this is a recent one but still worth putting in because the effect is going to be enormous.

It's difficult to think of two company's whose corporate culture is so opposed. On the one hand you have Oracle, which is full of the suited and booted type of enterprise. It's salesmen and woman take no prisoners, tow the corporate line and make Glengarry Glenross look like a documentary.

On the other hand you have Sun, where tshirts are pretty much mandatory and beer busts are the norm. Sun is a archetypal laid-back Silicon Valley firm, which is one reason it is being bought out.

On the business side Oracle is now in the hardware game and it is going to be interesting to see if the company gets a bloody nose from other vendors or if it will absorb Sun's server division and make it fly.

Shaun Nichols: The newest entry to our list has the potential to also be one of the biggest.

When the recession began, analysts noted that the companies who were best able to survive the downturn with cash intact would find themselves with some very good deals to be had from companies that didn't do so well. Oracle might have found themselves a great bargain with Sun.

Oracle has long been known as a software-only firm. Living off of hugely successful database and CRM lines, the company had little reach into the hardware market. Sun on the other hand was presiding over a solid line of server hardware but was having a bit of trouble making ends meet.

Five years ago the thought that Oracle could afford Sun would have been a pretty big stretch. Today, however, Oracle was able to pick up Sun and potentially turn itself into one of the biggest companies in the history of the tech sector. If that happens, the Sun deal will look like the bargain of the century.

7. Microsoft and Yahoo

Shaun Nichols: What could have been the biggest merger since AOL and Time Warner ended up as a much smaller story when the two sides brokered a search advertising deal last summer.

The whole thing started in 2008 when Microsoft made public a Us$42.3bn (A$47.9bn) offer to acquire Yahoo and its search advertising operations. The deal valued Yahoo at US$33 (A$37)  per share.

Yahoo, however, was at the time being run by Jerry Yang. The co-founder had been brought in to restore Yahoo to its former glory and Yang had visions of bringing back the dot-com boom atmosphere.

Shortly after, Yahoo turned down Microsoft's offer. Many believed that Yahoo management's distaste for Microsoft's buttoned-down approach was the main factor driving resistance to the deal.

In the following weeks, the companies went back and forth until Microsoft finally got fed up and walked away from the deal. Shortly after, Yahoo shareholders revolted and Yang was eventually removed with Yahoo's stock trading at a fraction of Microsoft's original offer.

New CEO Bartz later negotiated a much smaller search advertising partnership.

Iain Thomson: Yahoo has had some duff leaders in its time but Jerry yang may well go down in history as the most unfortunate.

When Microsoft made its offer to Yang to buy yahoo almost any MBA-trained business manager would have jumped at the offer. Microsoft was offering to buy Yahoo out at the top of the market for an obscene amount of money. Any shareholders would have made out like bandits.

But Yang made a mistake common to many founders, he got too personally involved with the company and couldn't see clearly and objectively. He, and many others at Yahoo, loathed Microsoft with a passion that burned and so did everything possible to put Microsoft off.

The end result was that Yahoo shareholders lost a lot of money, Yang lost his job and Yahoo signed a deal with Microsoft anyway for a fraction of the money it could have extracted from Redmond. Steve Ballmer's too professional to gloat openly but I suspect he was having a hard time not smirking when he inked the new deal.

6. eBay/Skype

Iain Thomson: When eBay bought Skype for US$2.6bn (A$2.9bn) in 2005 a lot of in the industry were rubbing our heads.

What was eBay thinking was the common refrain. Paying multiple billions for a company that didn't show a profit, was unlikely to and had no obvious tie in with eBay's roadmap, unlike PayPal. Someone in eBay managemnt must have had a few we thought and would wake up thinking “What have I done?”

A good friend who works for a competing title was on the BBC talking about the eBay deal and put it best. His remark was cut before transmission but was " Well it's nice to see it's not just me that surfs the internet drunk buying things I don't need."

eBay has since admitted it made a mistake and has written off a lot of the value of its investment to placate shareholders. Nevertheless the Skype legacy isn't a good one and anyone thinking of voting for Meg Whitman in California should remember that.

Shaun Nichols: Iain, that friend highlighted an irony that anyone who has ever woken up to a hangover and auction receipt for a set of antique bagpipes can appreciate.

In only a few years of covering the tech industry I have found out one very basic truth: a popular technology is not the same as a good technology.

From AOL to Friendster to Second Life to Facebook, hype always seems to mask long-term viability, and sometimes otherwise smart companies can make a big mistake and pay a premium for a firm that soon tanks. This was the case with eBay and Skype.

The obvious shortfall of free services is that by nature they don't usually generate much in the way of revenues. Normally this would be the sort of thing that companies take into consideration, but when said technology is the "next big thing" that doesn't always get taken into account and deals are made not on long-term viability but on media excitement.

5. Google and YouTube

Shaun Nichols: In 2006 YouTube was facing some serious hurdles.

Though the video-sharing service was drawing huge traffic numbers and users were uploading millions of videos, the company was dogged by numerous piracy suits from film and television studios and many in the industry had questions about the company's long-term revenue prospects.

Enter Google. The Mountain View search giant was looking to add a video site to help push its advertising operations had not only deep pockets, but a good-sized team of lawyers in its arsenal.

The two sides soon agreed to a US$1.65bn (A$1.86bn) deal that not only bolstered search revenues, but also gave YouTube a solid backing and a much stronger position in its dealings with the studios. Before long the site struck deals with the studios and labels, and Google's engineering muscle was put to use developing new copyright protections and tools.

Iain Thomson: I suspect the YouTube experience is very much in the minds of the people currently working on Twitter.

On the face of it the two platforms are similar – both web 2.0 systems that are short on cash and the means of generating it. Google saved YouTube's bacon, even if it still hasn't worked out a way to make serious money out of it. Twitter must be hoping for a similar white knight to ride over the horizon.

Google pretty much saved YouTube's bacon from its legal concerns, but the merger can't be said to be an unqualified success. Google got very little from the billion dollar deal except a popular web site with lots of hits. Monetising that is going to be very difficult – there's a limited market for funny cat videos.

4. AOL/Time Warner

Iain Thomson: If you wanted a deal that typified the excesses and lunacies of the first internet bubble then this would be the one.

On the one hand you had AOL, the darling of the internet, who had more dial-up internet users than anyone else in the market and was even having films made about how it was changing consumer email practices. On the other hand you had time Warner, a huge media conglomerate that was looking to break into this newfangled interweb thingy. It was a match made in hell.

The deal was one of the biggest in corporate history and, we were told at the time, would create a behemoth to tackle media in the internet age. In fact you got more of a Jabberwocky, a useless, stitched-together construct that was no use to man nor beast.

The latter-day head of time Warner has since apologised for the deal, calling it the biggest mistake of his career. We could have told him that for nothing.

Shaun Nichols: Sure, there's a generous helping of hindsight at our disposal here, but surely someone involved in this deal had to notice that cable connections were a lot faster than dial-up.

It seems that the biggest mistake that a company can make in an acquisition is to buy a company because it's hot right now. If the company is already big, you've waited too long to get involved and will likely take a huge hit on the deal.

This was definitely the case with AOL/Time Warner. At the time it was hailed as the deal of the century; AOL was the soaring internet startup and Time Warner was the old media stalwart. Together they were supposedly setting up the biggest media company of all time.

Unfortunately, nobody bothered to consider the long-term outlook and emerging technologies. AOL based its business on a dial-up and walled garden setup that people were already tired of, and when local cable firms picked up on how easy it was to transmit digital information over their current connections, everything fell apart for AOL.

3. AMD and ATI

Shaun Nichols: AMD's 2006 decision to purchase graphics specialist ATI came at a heavy cost.

Shortly after the deal closed, AMD's processor sales began to dive and the company started to haemorrhage cash. With rival Intel pulling away in the processor market, many questioned the wisdom of spending $5.4bn on ATI.

The deal did, however, offer some major long-term promise for AMD. With the need for parallel processing growing, many began to look to graphics processors as a way to supplement CPU performance.

AMD has the advantage now of having a major GPU vendor in-house, and the company was and still is pursuing projects to better integrate the CPU and GPU as well as craft better on-board graphics platforms.

The acquisition also allowed AMD to avoid the types of licensing and patent quarrels that have begun to arise between Intel and Nvidia as new chip designs and technologies hit the market.

Iain Thomson: I sometimes wonder at the decisions AMD makes and how it follows through on them.

When AMD introduced the Opteron it had hardware that put it a solid year ahead of Intel, yet it seemed to do very little with it. Then the deal with ATI, at just the wrong time to leave the company short of cash.

As it turns out the merger has worked quite well. ATI is producing some stonkingly good graphics cards at a time when the needs of the GUI are growing dramatically. Having a tame graphics arm is also helping AMD with its core processor business and, I agree with Shaun, makes it much more likely that Intel will make a play for Nvidia sooner rather than later.

2. Apple/NeXT

Iain Thomson: To say this was a merger is understating it – it was more of a love in.

Management had spurned Steve Jobs and forced him out of 'his' company so he sold all his shares and walked away to start NeXT. It was a classic 'toys out of the pram' moment and made Steve jobs look like a petulant fool.

NeXT went on to burn mountains of cash building computers that very few people were willing to pay for. Its designs were innovative, its hardware sexy and its software a revolution, but all this came at a price that have corporate accounting departments shuddering.

Meanwhile, back at Apple, Scully's reign was going from bad to worse and the company was in so much trouble it had to get a bail-out from its arch-enemy Microsoft in order to stay afloat. Apple needed a shot in the arm and luckily for it Steve had got over his tantrum and was ready to come back into the fold.

When Apple bought NeXT in 1996 it might as well have but up a big banner saying 'Welcome home Steve'. The deal was all about getting Steve back to pick up the pieces, but Apple did get more than that for its money.

Chiefly it got a really good operating system, something Apple had been lacking for some time. The work on NeXT led to OSX and the success of that operating system can be traced directly back to its roots in Jobs' bastard step-child company.

Shaun Nichols: As a Mac geek, I have a soft place in my heart for this deal. It likely saved Apple and as played a huge role in shaping the web as we know it.

What a lot of people don't know is how close it came to never happening.

In the mid 1990s, Apple was in crisis mode. Due to mismanagement and short-sightedness on the part of executives, the company had a collection of failing products powered by a MacOS operating system that was utterly incapable of meeting the performance and stability demands of the time.

Knowing that they needed to rebuild from the kernel up, Apple's brass went on the hunt for a new Macintosh operating system.

The first target was BeOS. The promising new operating system is still considered by many to be amongst the finest ever and was initially targeted by Apple. But chief executive Jean-Louis Gassee set the buyout price too high and Apple looked to other options. Apple co-founder Steve Jobs was able to sell the company on his new venture, NeXT, and the rest is history.

1. HP and Compaq

Shaun Nichols: At a time when the industry was teetering on a radical shift, HP made what would become a monumental business deal.

The company brokered an agreement to pay US$25bn (A$28bn) for what was the largest acquisition the industry had ever seen.

The deal also created a massive new contender across multiple areas of the IT industry. In the enterprise space, Sun and IBM found themselves having to face a formidable new contender in HP. Meanwhile, the once mighty Dell now found itself with a major threat for the PC sales crown in both the consumer and enterprise markets.

The transition was far from smooth, however. Financial performance sputtered amidst the economic decline and a ton of talent was lost both to layoffs and resignations as the combined companies struggled to remake their corporate culture.

In the end, the deal did achieve its ultimate goal. HP is one of the biggest names in the industry and has become a major player in just about every space of the technology sector.

Iain Thomson: While Shaun may be right that HP achieved its goals with the merger this was down more to luck than judgement, and the company lots a lot of goodwill along the way.

Right from the start the merger looked like it was going to cause serious problems. Carly Fiorina had come in to HP on a wave of support from staff. She's an excellent speaker and, watching her address staff at a conference, she got them all motivated behind the deal. But there was a cost.

The merger was opposed by member of the founder's family, who rightly feared that it would change the corporate environment for the worse. The battle was long and hard and accusations of phone tapping were bandied about, accusations that now look a lot more believable in light of later events.

After the merger went ahead HP lost its corporate culture, one of the best in the industry when it came to looking after staff, and gained a hardware arm it seemed to not know how to deal with. The company became more about sales than engineering and lost its innovative edge.

The focus on sales, and mistakes by Dell, has left HP with the number one position in hardware, but to call the merger success is possibly overegging the pudding. HP is doing well now, but we have yet to see if that will last in light of losing so much of what made it special.

 
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