The new modality of acquisition

Posted: 09.24.11

In the 1960s the idea of building a larger company through acquisitions took hold. The model was to build a conglomerate which would be immune to market variations in various segments. Litton Industries, Ling-Temco-Vought, and, ITT were some of the pioneers of the concept. A conglomerate is a multi-industry company, large and usually multinational.

The concept although still with us (e.g., GE) has diminished in popularity as investors sought greater ROI and faster stock price appreciation. Whereas a conglomerate can protect you from industry sector ups and downs, it is also is a basket of companies and not all of them have high PEs or growth rates.

One of the characteristics of the era was small companies seldom got acquired. They were considered noise and too expensive in management time to be bothered with—how different it is today.

During the 80s companies began making more strategic acquisitions, but not a lot and not quickly. Then in the 90s as the internet bubble heated up so did the M&A activity and companies that thought they had missed the boat bought properties to catch up. Few ever did, and shareholders are still paying for those missteps and misguided efforts. Some of the most famous (or infamous) were AOL-Time Warner, and GeoCities, purchased by Yahoo.

Things cooled for a while after the bubble pop, but there were a lot of companies left with expensive and questionable assets—a forerunner to diversified assets.

In the early to mid-2000s we saw the new acquisition strategies (yes, there are two), and possibly an explanation for why corporations are sitting on such huge reservoirs of cash.

The two new modalities of acquisition are:

  • Get vertically strong and kill the competition
  • Change direction

Today companies acquire other companies, of all sizes, for the technology needed to fill out their industry stack. Companies want to be vertical and own all the IP in the stack. The new T-shirt of today is this:

He who dies with the deepest stack wins.

In Japan, a different model of acquisition is practiced called keiretsu.. Whereas the Western model consists of a single corporation with multiple subsidiaries controlled by that corporation, the companies in a keiretsu are linked by interlocking shareholdings and a central role of a bank. Mitsubishi is one of Japan’s best known keiretsu, reaching from automobile manufacturing to the production of electronics such as televisions.

And in South Korea Chaebol is the acqusiton model where the company is owned and operated by a family, and therefore inheritable. Some of the well-known Korean chaebols are Samsung, LG and Hyundai Kia Automotive Group.

Get vertically strong and kill the competition

Today if a company is building a component in a system, say a SoC for a mobile phone, they want to control the platform. So if they can, they buy adjacent companies to fill out the stack for that product line. If it is a component supplier they do that to offer one-stop shopping to the OEMs and ODMs.

There are two types of vertical conglomerates today, the device builders and the component suppliers. The device builders like Apple, Samsung, and maybe Sony try to own the consumer and supply and satisfy all the consumer’s needs. So far Apple has been the prototype for this model and the emulation attempts by companies like HP, LG, Nokia, and others is a tribute to Apple’s success.

The component conglomerates are companies like Intel, Qualcomm, and Broadcom. These companies and the smaller examples (in terms of making acquisitions) like Marvel, Sigma, Nvidia, and Imagination Technologies are adding technology and people faster than they could through organic means. In the 80s companies like TI and National grew more organically.

The irony of the getting vertical via acquisition is that after ten years companies were advised by smart consultants and investment bankers to shed divisions and product lines that weren’t leverageble by the company’s core strengths. Job out manufacturing, and distribution, and programming, and, and... Famous break up artists like Carl Ichan, T. Boone Pickens, and Drexel Burnham would buy into a company, undermine the board, gain control, and sell off assets—getting as un-vertical as possible.

Change direction

The other acquisition model, which might be called the grass-is-greener model, is to make acquisitions that re-position the company into a different (and maybe adjacent) market segment. One example that comes to mind is HP trying to turn itself into SHP. Not satisfied with being a hardware supplier, HP wants to emulate Oracle, IBM, and its idol SAP because the profits and/or growth look larger and faster in that segment.

All of these acquisition-conglomerate actions are based on copycat mentality. The copycat CEOs and their lackey BODs call it a vision, and then after a year or two fire the CEO because she or he didn’t have the right vision. BODs can be so fickle.

The question remains, what will the corporations with those huge piles of cash do with it? SHP it, get vertical, or split up the company and distribute the assets to the shareholders? (giggle).