The Microsoft-Skype announcement reminded of one of my first posts in which I wrote about the perils of large scale M&A. While big deals are value destroyers, there are some instances where transactions make sense. When can an acquisition create meaningful gains to both companies as well as consumers in general ? Let's look at Google, a case study for everything these days, including the merits of dealmaking.
In 2005, Google made its first foray into mobile with the acquisition of a small startup called Android. Fast forward six years later, Android has now become the top smartphone OS with a 30% market share. There is no question Android could not have done this on its own. The pie grew and we as consumers finally had a viable alternative to the closed- system Iphone. Wins all around, right?
That same year, Google also invested in Dodgeball, a location-based social network. Similar to Android, the founders were brought onboard to integrate the company into the Google ecosystem. This time, the Google experiment flopped. The company ultimately killed the service altogether; and in early 2009, the founders of Dodgeball left to create an exact replica company. FourSquare, one of the hottest tech properties, now boasts a 7.5M userbase (and growing) and is frequently sited as a potential IPO candidate.
How could the same company buy two different startups the same year, employ the same execution strategy, and have such divergent results? One blossomed into a transformative software platform while the other quelched a new idea that ultimately thrived on its own.
With Android, there was a defined, specific goal in mind. Google wanted to give away a mobile OS to layer in its search, so it bought Android. There was no need to create some new product or capability that didn't exist. There was very little execution risk- Google simply needed to throw more money at the nascent company, leave it alone, and take it to market. As we all know, large companies don't accelerate innovation or product development (not even Google), but they provide the thing that startups need the most -- money and distribution. How else could Android have forged partnerships with all the major handset makers and carriers in such a short amount of time? Given the size and savvy of its competitors (Microsoft, Blackbery, Apple), they might have missed the window of opportunity had it chose to go alone.
What was Google going to do with Dodgeball? They knew social networks were a threat but didn't know how to combat it (and still don't for that matter). Buying Dodgeball got them "in the game", but there was no clear cut strategy for what to do with the company. Dodgeball didn't need distribution the way Android did, they simply needed time to grow. Android thrived not because of what Google did with it, rather what Google brought to the table. The Dodgeball deal was an attempt to mask a larger company weakness with no real rationale for the deal itself.
Successful deals happen when there is a simple well defined strategy and a predetermined endgame. It needs to be easy to execute and the expected value of the good needs to outweigh the negatives of big company inertia with little risk. Distribution plays are the most common. Kashi cereal is widely available thanks to Kellogg. I bought a Goose Island draft on my last trip to New York because of the deep pockets of Anheuser Busch. Selling a new beer to a bar that is already a customer is not rocket science.
If company executives can't explain why they are doing a deal and how they will execute it in 20 words or less, it's probably not one worth having. Ballmer probably needs 12 Powerpoint slides to outline the Skype rationale, whereas its far more clear what Nestle plans to do with the Austin-based Sweet Leaf deal it announced last week (say it ain't so Leaf).