So this is not really a new post as I wrote it back in the Google days for internal consumption. But it resurfaced recently and I thought it would be fun to publish here. I wrote it primarily as a framework for corporate tech M&A but also as a response to the common question we received, “What is Google’s M&A strategy?”
M&A is not a strategy, it is a tool. It is a tool to help support a strategy or set of strategies.
Before explaining this statement in more detail, I’ll posit that there are two primary acquisition types that technology, particularly software, companies contemplate and execute: “bolt-on” deals and “big” deals. Bolt-on deals are the bread-and-butter acquisitions for any software company. These deals are typically small, as defined by dollars spent and people employed at the target company, and are almost always championed by a product or engineering team at the acquiring company. Almost by definition then, this means that the team and product (or feature!) being acquired will slot into an existing product roadmap at the acquiring company. Often these deals involve acquiring a small company whose business is hardly proven, but where there is high perceived value of the product or team by the acquiror. These bolt-on deals will always be the core acquisition type for software companies because the number of available targets is high and the deal success rate is high, relative to M&A overall. Success in this case is defined by integration into the buyer organization and by value extraction, i.e., the acquired team remains employed by its new parent for a significant period of time, and the IP developed by this team has been integrated into a product. Put another way, there are no signs of NIH (not invented here); the body has not rejected the organ. This is success for the bolt-on deal.
Big deals are much more difficult. A big deal is simply one that doesn’t fit the description of a bolt-on deal. Big may indeed refer to size: large deal price, number of employees being acquired, geographic sprawl of the target, or the size of the balance sheet inherited. But it also may refer to deals where there is no natural internal sponsor. This may be because there is no existing product team who is in the same business or serving the same customer as that of targetco, or where there is an existing product team, but whose product is losing ground in the marketplace to the target company. And who wants to put themselves out of a job or admit to having an inferior product? For big deals to work, they should be sponsored by senior company executives who can help smooth over the internal speed bumps that naturally arise. Furthermore, to build a long term competency in doing bigger deals means building a long term competency in deal integration. Integrating people, technology, and operations for big deals is an entirely different and more time-consuming process than is required for bolt-on deals. Integration of these deals, whether it be complete or just at the product development, or sales or G&A level, is particularly important because technology deals are almost always revenue synergy driven. And some level of integration is required to achieve these synergies. Whereas a steel producer acquiring another steel mill is largely about cost savings via elimination of duplicative functions or broadening the asset base to lower borrowing costs, etc., in the world of software, where hard assets are not at a premium and the marginal cost to produce a good approaches zero, acquisitions are about revenue synergy, not cost synergy. So thoughtful consideration must be given to how the companies should integrate and who at the acquiring company is responsible for it.
Getting back to the central topic of M&A and strategy. A corporate strategy may be something like “build products that customers will love,” or “enter the enterprise software business by end of FY08,” or “grow overall revenue by 40% next year.” In each of these cases, the primary way to go about achieving a given strategy is to utilize the talent we have in-house to execute on product development and sales & marketing initiatives, hopefully in a long term profitable manner. Simply put, acquisitions come into play when we determine that we cannot economically build the products we want to offer. Period. That is as close as you can come to an M&A strategy statement. This is particularly true for large software companies, who theoretically can build anything given sufficient time. A company may come to a decision to acquire for a few reasons–for example, we don’t have the domain expertise in house and we can’t hire rapidly enough, we don’t understand the customer in a given market (geographic or product) well enough to build useful products in a reasonable time frame, or we sense a window of opportunity in a given market and we need to capitalize on it quickly. Software companies acquire primarily for talent, IP, and speed-to-market. This is true of both bolt-on and big deals. Acquiring revenue (read customers) may also come into play for big deals, but it still gets back to acquiring what the company cannot economically build in the time frame desired. I think about the M&A process in the following way: The strategy is to build a given set of products that our customers love. The exercise is to identify the product areas where we cannot economically build what we want to offer these customers and the tool available to us for filling these gaps is M&A.
Lastly, it is instructive to consider proactive vs. reactive, or opportunistic, M&A. In the context of investments and acquisitions, the word opportunistic often has a negative connotation. It implies that the buyer or investor is not executing a well-considered strategy, and instead is casting about for deals wily-nily. The reality is that there exists an element of proactivity and reactivity for all corporate development teams, private equity buyers and venture investors. What I’ve described in the paragraph above is the proactive part of corporate M&A–seeking acquisitions that directly support a specific product strategy. But we operate in an environment where the assets we’d like to buy don’t always exist or are not available, or at least not available at a price we’d consider reasonable. On the flipside, there may be assets that become available that don’t fit neatly into a given product strategy. But perhaps they fit into a broader company strategy or mission and warrant evaluation. We should be comfortable with, and prepared for, this dual approach to M&A.
