However, before we examine strategies and tactics that Google has employed in its transactions, let's examine how M&A performance has traditionally been measured, as well as some of the most common reasons for M&A failure and success.
M&A Activities
Developing a successful M&A program is a major challenge for any organization, arguably significantly more difficult than operational functions. Nevertheless, the pace and volume at which technology firms have been buying is staggering. For example, according to Thomson Reuters, the total spent on technology M&A worldwide during the first quarter of 2014 was $65.2 billion. This represented the largest dollar volume for any equivalent period since 2000.
Consider the breadth of activities that must be considered in doing a deal (Table 1.1).
Table 1.1 Deal Activities
Strategy
First of all, a compelling strategic rationale for a transaction must be developed. This may involve responding to an opportunity or shock in a market. Or it may be based on a creative vision whereby the company desires to establish new positioning in a market or even attempts to create a new market. For example, Google's cluster of eight robotics acquisitions in 2013 clearly signaled that the company saw significant market opportunity in areas that could range from robotic manufacturing to android-assisted home health care. Although to be successful such strategic thinking necessarily must involve senior executives, a company such as Google also has strategy leads engaging in analysis to support the growth of each major business division, including areas such as search, social, mobile, and YouTube.
Strategy also involves establishing a systematic approach to M&A activity. Organizations have established systems for virtually every activity of the firm – from HR management to supply chain management – but typically lag in thinking systematically about M&A and other corporate business development activities. There are some notable exceptions, such as GE Power Systems (later renamed GE Energy), as documented by Robert Bruner.5 We'll later examine Google's systematic approach to M&A.
In addition, deal strategy involves determining the optimal type of transaction. This includes knowing when not to acquire a company, but instead designing an alternative form of partnership relationship. For example, in 2003, as Apple was in the process of launching its iTunes platform, the Los Angeles Times reported that Apple was considering the purchase of Universal Music (a global player in recorded music) owned at the time by Vivendi.6 Apple correctly decided against the purchase. Doing so, among other things, would have created supply-channel conflict with other music providers that it needed to launch iTunes into a platform with a broad music library. Instead, Apple licensed music from Universal (and other music companies) in order to build an extensive collection for users to download using iTunes. (In 2014, Apple was facing different challenges as it attempted to maintain a leadership position in digital music and, as we'll see in Chapter 3, decided to engage in a major M&A activity to do so.)
Deal Economics
Second, deal economics must be evaluated. This involves conducting a valuation analysis that is appropriate for a given M&A transaction. This may require obtaining a constellation of values using methodologies such as discounted cash flow analysis, revenue, or earnings-related multiples using public company comparables, multiples from past M&A transactions, or multiples of something-or-other in early-stage ventures, There is rarely one North Star valuation metric. The constellation approach is intended to provide an acquirer with perspective regarding an appropriate range of value.
Jaw-dropping valuations have not been uncommon for deals in technology markets, including some Google transactions. Although not as staggering as the estimated $350 million/employee multiple that Facebook paid in its $19 billion acquisition of WhatsApp in 2014, Google has spent $1 billion or more for newly minted companies such as YouTube, Waze, and Nest.
Such valuations subject a company to critics who characterize the purchase as an irrational spending spree, but a deal might be later dubbed as brilliant if the target's platform proves out as a core asset in the acquirer's growth.
Synergy analysis is an essential ingredient in valuation, although synergy is perhaps one the most misused terms in corporate strategy. The word synergy has a most interesting origin as part of business jargon, according to the following account.
Professor J. Fred Weston was a giant in the field of M&A.7 He arrived at UCLA from the University of Chicago in 1949 and over his career wrote 32 books and 147 journal articles, many of which dealt with M&A. He mentored many outstanding graduate students, including Nobel Laureate Bill Sharpe. I worked with Fred, taking over as faculty director for UCLA Anderson's Executive Program on Mergers & Acquisitions from him in 2005. Fred continued to speak in the program. When I introduced him as the “John Wooden of M&A” (referring to UCLA's legendary basketball coach), it was scarcely an overstatement.
Fred told the story about how the term synergy came to be used in corporate deal making. The year was 1950, and Fred was at lunch in Westwood, California, with executives from a nascent industry that would later become aerospace. Fred saw a drink menu on the table that promoted Irish coffee, The Perfect Synergy (Irish coffee blends coffee and Irish whiskey). Not knowing what synergy meant, Fred looked up the term after he returned to his office at UCLA and saw that synergy equals the interaction of two or more agents so that their combined effect is greater than the sum of their individual effects. “Now that's what an M&A is supposed to do,” thought Fred. He began using synergy in his writings to characterize successful deals, and the term became a cornerstone of academic and professional thinking.
Many of Google's deals involve estimating revenue synergy that is believed will occur sometime in the future. Only rarely does a Google M&A transaction center on cost savings resulting from the combination of Google and the target company. Much of this anticipated revenue synergy involves creating or accelerating new products or services – rather risky synergy goals, but we'll see how Google considers and attempts to manage such risk.
Organizational Design
Third, organizational design plays a crucial role in M&A activity. For example, it's widely understood that unless deal integration efforts succeed, the premium or even the basic consideration paid for a target can evaporate. Some executives feel that this implies that integration efforts must necessarily be concluded rapidly, certainly within a year. After all, cash flows associated with an acquisition have time value, so the sooner positive flows are realized, the more valuable they will be.
Although rapid assimilation is the correct path for some deals, we'll see that one size doesn't fit all with M&A integration. In fact, there are numerous styles for successful integration, some of which require that targets be left alone for a considerable period of time after the deal closes.
Google has come to understand that there is not a holy-grail path to integration and utilizes numerous styles for its acquisitions in attempting to make a deal work. For example, consider Google's 2012 acquisition of Wildfire Interactive. Wildfire's technology enabled advertisers to serve campaigns on social websites such as Facebook, Google+, Twitter, Pinterest, YouTube, and LinkedIn. When Google acquired Wildfire, Jason Miller, a Google product manager, made this blog posting: “With Wildfire, we're looking forward to creating new opportunities for our clients to engage with people across all social services…social presence can complement all marketing campaigns – search, display, video, mobile,