When do acquisitions make sense?
As I have written extensively in the past, by and large I am not a big fan of mergers and acquisitions (M&A). And I have historical data to back up my positions. Almost 60% of M&A destroy shareholder value. However, there are always exceptions and let me share my thoughts on by analyzing a hypothetical scenario.
Why Google needs to acquire Technorati?
Among technology strategists, it is no secret that Google is losing the ongoing battle for searching blogs, despite having a relatively robust business model. While Google indexes blogs and serves results from blogs by treating them essentially as web pages (though there is a theory that blogs receive preferential treatment from Google and other search engines), Google (like MSN and almost all other search engines except Yahoo) does not index them in a timely manner. It is true that not all content in a blog is time-sensitive, but a lot of it loses its relevance within a matter of hours or days. On the other hand, it takes Google several days (for large, highly popular blogs) to weeks (for less popular blogs) before these articles are served in a search result.
No wonder then that others saw the opportunity that Google missed. One company that seems to the best job is Technorati – a company that provides live search of the web. So those of us who read and search for interesting blogs have no place for Google as a search engine. We rush to Technorati. And as is widely known, blogs are the fastest growth category in the world of online publishing.
While Google may already be working on the technology or can develop it quickly, it is pretty obvious that it is not the owner of state-of-the-art. In other words, the fastest way for Google to catch up in the race is to acquire Technorati. Google will get immediate access to the technology and the index and will give it an edge over Microsoft that is going to incorporate RSS feed technology (the underlying technology for blog syndication) in Longhorn. The acquisition will not have a material impact on revenues or profits but will clearly fill a technology hole in Google’s portfolio.
What does it mean for you?
- Mergers and acquisitions should be avoided in most cases, particularly when the idea is to show improvement in sales and/or income without doing the hard work of growing your business.
- An acquisition may provide strong competitive advantage if it gives you access to a new technology. However, considering my skepticism of M&A in general, it is much better to explore other options like licensing and strategic alliances before pursuing an outright acquisition.
- A technology-driven acquisition should be done before the owner achieves critical mass. Technorati, for instance, is building momentum as we speak. Within a matter of months, the company could gain enough traction to go public and create enormous buzz on Wall Street. At that point, Google will have to shell out a lot more cash for Technorati.
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