One big reason a company acquires another is to grow “quickly”. If so, do the following two announcements show that?
“Twitter recently acquired Summify and shut it down.”
“Amazon recently acquired TeachStreet and shutting it down on 15th Feb.”
Microsoft, Google, Facebook, Apple, and many more companies acquired companies that they killed, intentionally, post-acquisition. Why acquire and then kill? Hmm… that is tough to answer but let me try. But before that, lets look at a few reasons why acquisitions happen:
- Perceived Synergy: Hope is that the overall value created is at least more than the sum of value created individually by both companies. An example would be Amazon’s acquisition of zappos, woot, diapers.com, and many more deals based online shopping sites.
- Risk mitigation: Overcome competitive pressure and threats by acquiring the competition. Microsoft did this a lot in the early stages and most recently Oracle’s acquisition of PeopleSoft and Siebel are in my opinion risk mitigation than synergy based acquisition.
- Diversification: A conglomerate which is sitting on cash piles could acquire a company in a market that it doesn’t currently take part in. The hope is either to lower its risk of investments or to increase the company’s foot print in the market. You will find this a lot in financial markets. However, it is a common practice in other industries as well, such as in the retail space Walmart has diversified many ways. Most recently, it foraged into online streaming video service.
- Integration: Either vertical or horizontal, depending on the case, integration helps a company be a bigger part of the value chain of a business/market. Mostly found in manufacturing industries. Apple is a great example given its depth of vertical integration to design, build, market, sell, and service its products.
- Buying Innovation: If a company lacks the resources, capabilities, and support structure to innovate, it could go out and shop for an innovative company within its domain of interest and just acquire. We see this a lot in pharmaceutical industries where the innovation cycles are long. High-tech industry is always a big contributor in this category, given the short timeline within which a company can fold the innovation into its portfolio and make significant progress. Microsoft’s acquisition of Skype could be a good example for this. Sometimes, it’s the lack of time that pushes this kind of acquisitions. For example, Google acquired Android not because it doesn’t have the resources and capabilities to come up with a mobile OS. It’s the time factor that forces such an action.
There could be some other reasons for acquisitions, but those fall under a small group. For example a company in financial crisis that has put itself for sale, a family business with no one to run it, a company divesting some of its business units, etc.
Based on the history of acquisitions so far, it is a fact that most acquisitions fail after the merger. A primary reason could be the mismatch in organizational fit, leading to a poor merger and change management of both companies. Merging two schools of thoughts or cultures is not as easy as one would think. Poor vision and lack of leadership to make things happen contribute much to this failure. Another reason could be a mis-assessment of the value, strengths, and capabilities of the acquired company or the company that acquired. A well performed due-diligence can easily find such issues prior to the acquisition. Yet another reason could be due to confused customers, especially in B2B markets, resulting in declining market share and revenues. Increased operational costs, shorter product life cycles, attrition, etc. could be the other contributing reasons.
But, acquiring a company and shutting it down intentionally is different game. Some strategic (or may be not so) reasons for such an action could be:
- Control the Fragmentation: In order to control the number of options available for the end customer, a company may acquire some substitute products/services and just kill them. This will help in controlling the fragmentation of the market and hence will allow the players to better control the pricing.
- Buying Talent: In the special case of start-up acquisitions, this is an easy way to acquire a best pool of talent. The interest here is to hire a high-performing team, not the idea or product.
- Brand Clash: If the acquired company is not shut down, there could be brand confusion and clash in the market, forcing the parent company to shut it down.
I would love to hear your thoughts on why company’s kill the acquired business intentionally?
Please post your comments and lets debate.
