by Brenon Daly
Consultant-speak to the contrary, not every company is a tech company. The idea that old-world companies could magically boost their status – and accompanying valuation – by reaching for a shiny new startup might have played well in the boardroom, but it tended to break down in the real world. A company rarely becomes something by buying something.
Nonetheless, the allure is understandable: Take a plodding business and make it light on its feet by adding in a bit of acquired technology. That M&A drive is sharpened by the numerous cases of upstart startups siphoning off tremendous valuations from the otherwise fairly staid industries. (Think of Airbnb valued in the private market at more than $30bn, higher than virtually any online travel agency or major hotel operator. Or just ask taxi drivers in any major city what their medallions are worth since Uber came along.)
Deals born of envy, however, lead mostly poisoned lives. Returns inevitably dwindle as the culture and operations of the acquired company get ignored or diluted by the larger acquiring company. The whole reason for the deal gets snuffed under the weight of unrealistic expectations of miraculous transformation. (For more on lessons learned in that area, see my colleague Scott Denne’s analysis of Best Buy’s purchase yesterday of GreatCall, a transaction closer in purpose for the electronics retailer than its earlier M&A forays into the larger IT market. Most of those earlier, more ambitious deals have been unwound.)
And yet, the desire to ‘digitally transform’ what are essentially analog businesses continues to push M&A activity ever higher. Brick-and-mortar retailers, industrial equipment makers, pharma giants and others are all shopping for tech. This strategy has meant more spending by non-tech vendors on tech startups so far this year than any other recent year, according to 451 Research’s M&A KnowledgeBase. In the first half of 2018, non-tech acquirers handed over $18.8bn for VC-backed startups, more than they spent in the previous half-decade combined.
Of course, this year’s spending is skewed by Walmart’s blockbuster $16bn purchase of a majority stake of Flipkart, a transaction that not only seeks to combine two irreconcilable business models but also has the added complication of geography. (The difficulty of successfully shopping internationally shouldn’t be underestimated. A look at the expand-then-retreat M&A programs of Groupon and eBay show how difficult it is to get returns on deals outside a company’s home market.)
More broadly, we would suggest that the current trend of adventurous acquisitions by non-tech companies will be the first casualty when the nine-year-old bull market finally dies of old age. It’s one thing for a cash-rich, old-line company to go shopping when business is booming like it is now. (Earnings at the average S&P 500 company were up an astounding 24% in Q2, with double-digit revenue advances.) But when times get tougher, old-world companies won’t be dabbling in digital deals. Downturns mean playing defense, not offense.
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