Why do so many vendors mess up acquisitions? It’s always been a relevant question because, well, vendors always seem to mess them up. It’s relevant now because of the Ericsson announcement it was acquiring Cradlepoint, and that deal could be a poster child for a number of the issues I’m going to raise.
There are two broad reasons why a tech acquisition makes sense. The first is that you’re buying revenue or a unique customer base, and the second is that you’re buying a position in a market growing so fast that you can’t wait to develop your own product. While it might seem obvious, the key for any vendor looking to acquire is to first identify which of these are their motivation, and second to protect that proposed benefit with specific steps.
Buying revenue is a pretty straightforward reason, and if the deal is being shepherded by the CFO it’s likely to make sense. The key is usually to look at the share-price-to-revenue relationship of both companies. The ideal situation comes when a company that’s trading at a low share-to-revenue relationship is acquired by a company with a higher ratio. The deal alone will apply the buyer’s multiple to the seller’s revenue and it’s a win.
Buying a customer base isn’t nearly as easy to navigate. There has to be a sense of symbiosis, meaning that you could expect to sell your product into the other company’s base. You obviously have to be able to keep the base intact, the base has to consist of a reasonable number of real prospects for your products, and you have to be able to deliver the message through the sales channel. Sometimes the “old” sales channel won’t be able to absorb the “new” message, and if they can’t and you decide to augment or replace them, you may lose the base.
If you want real complexity, a real potential for a mess, though, it’s impossible to beat the situations where someone buys a company to get a position in a critical future technology. This can fail for a whole bunch of reasons, so let’s just go through them, starting with the ones I’ve seen the most.
The biggest issue I’ve seen by far is lack of any real vision of the future, driving, opportunity. Network vendors based in the US (not to name any names!) have a tendency to buy companies more for sales objection management than anything else. “Gosh, I’d have won that deal if we’d had one of those darn widgets,” the salesperson tells the CEO. The CEO thinks a moment, then says “Well, darn it, we’ll just buy us a widget company!” and does. Maybe it’s not quite this stupid (at least, not always), but what does seem to be a universal problem is accepting sales input for what should be a strategic decision.
You have to start a future-strategic-position deal with a clear definition of the position you’re depending on. A market is an ecosystem, so don’t think “IoT drives 5G” as being a statement of a strategic vision. It’s a hope, unless you can frame out what the market that creates the drive is, who the players for the critical roles will be, and why those players will accept those roles.
You can easily see how believing that “IoT drives 5G” (for example) could lead a 5G player to think about buying into the IoT space, but that would likely be wise only by happy accident. There are a lot of steps, players, products, and market steps that need to connect those two dots, and unless the buying company is darn sure they can make all those steps happen, the decision is a major risk.
A good question to ask is “is the company I’m buying already seeing revenue growth from the opportunity I think the deal will help me exploit?” If the answer isn’t a decisive “Yes!” then there’s probably some pieces missing in the opportunity ecosystem. Too many companies mistake media hype for revenue growth here. The media will run any exciting story. They will seek out people who can say something that makes it more exciting. If they ask an analyst how big the market is, and they get a ten-billion-dollar-per-year answer, they’ll tell the next analyst they ask that the bid is ten billion, and ask if they’re willing to raise. That’s how we get future market estimates that rival the global GDP.
Even if you have a viable opportunity and credible ecosystem, you still have to decide whether you can exploit it. If you don’t have a product available to support an emerging opportunity so credible and immediate that you can’t wait to build something on your own, then you’re probably not very good at strategizing that market. Is the company you’re buying any better at it? Where are the smarts needed going to come from? Can either company quickly generate a lot of media buzz (get some analysts to help if you can’t!)? Can you put together a strategy that you can execute on quickly enough? All these are critical questions.
All of the answers to all the questions may depend on another point, which happens to be another of the reasons why company acquisitions go wrong. Can you, acquiring a new company, merge the workforces and cultures quickly enough, and with minimal resentment, so that a new working team can be created? Assume the answer is “No!” unless you’re ready to work hard, and when your whole reason for the merger is to reduce combined headcount, you’re really in it deep.
A decent number of M&As are driven by what’s called “consolidation”. The theme is that Company A and B are competitors, both with decent market share. If one buys the other, the resulting company would have the combined revenue of the two, and would be able to cut a bunch of cost, including workforce and real estate. That’s arguably what brought Alcatel and Lucent together, and that marriage is still in counseling, even after the who package ended up inside Nokia. Any time there are going to be job cuts associated with M&A, you can assume that all those who see themselves at risk will start looking around “just in case”. If they find something, they may not wait to see how the dice fall. Those who are most likely to move are those with the best skills, who can attract the most favorable offers. In short, the very ones you needed to keep.
Symbiotic M&A is fairly common in the software space, but even there it poses challenges. The VMware decision to buy Pivotal, for example, is going to take some positioning, marketing, and strategy finesse to make it work. In the network space, I think it’s fairly rare to see a good M&A. For some companies, it never seems to happen.
That’s what Ericsson should be thinking about. Ericsson has never been a marketing powerhouse. Like most telco suppliers, they’re not strategic wizards either. Imagine, given the formula for successful M&A, how difficult it would be if you don’t understand much about strategy and you can’t communicate what you know in any case! There has to be a real vision of the future behind the deal, behind almost any M&A deal that’s destined to succeed. Ericsson needs to promote it in every way, or they’ve just tossed a bundle of money away.