When startups begin to get significantly bigger, a world of possibilities opens up, depending on where their products are and where they want to be. In order to be competitive in the marketplace, provide users value, and invest for the long term, CEOs and their leadership teams must decide which aspects of their business to focus on in-house, and when it’s better to augment and accelerate growth through acquisitions.
Successful acquisitions are rare — about 70 percent of purchases fail in terms of delivering on the original business case and driving the expected growth. However, this doesn’t mean buying another company is a bad move. It’s just one that requires a serious metric-driven approach, not only from a business and product standpoint, but also from a culture perspective:
- What are the clear objectives and expected key results from a particular deal?
- How will the new company integrate its products and resources into yours seamlessly while maintaining employee happiness?
- How will the two companies drive forward with a unified vision by both building something customers love and producing revenue?
Here are three key factors startups or companies of any size should keep in mind when considering acquisitions.
CEOs will try to rush the process
Buying a company isn’t like simply purchasing a new part and plugging it into a larger system. But the executives of acquiring companies tend to become overly aggressive in their big-picture plans. That means failing to fully include integration teams in the process so that they can craft a detailed execution that will balance reality and the CEO’s grand vision.
For example, eBay’s acquisition of Skype for $2.6 billion in 2005 was at first glance a great deal — the goal was to improve communication between users via the VoIP service. However, constant shuffling of management teams, apparent user sentiment that email was good enough for eBay, and clashes in customer service culture ultimately derailed the deal. Vision outweighed tactical efforts and, as a result, far too much time was lost with no value added (well, not product value anyway, as eBay eventually sold Skype for $8.5 billion in 2011).
In my personal experience with Yahoo, we had our fair share of wins and misses. I was involved in several integrations that drove incremental value (Overture, Right Media, Wretch.cc, Citizen Sports, Maktoob, and others), and they succeeded as a result of alignment on goals, technical execution, and culture/team integration. Unfortunately, I also went through the tough process of shutting down or divestiture of several products which were the result of acquisitions: Maven Networks, GeoCities, Delicious, and HotJobs, among others. In those cases we may have had solid initial strategic alignment, but missed when it came to integrating the teams and prioritizing them post-acquisition to deliver on the original goals.
The point is that companies and CEOs, in particular, must allow teams that will actually be integrating the new company to act as COO early in the process, instead of making the integration an afterthought to a big deal.
Acquisitions are easier for smaller companies
Because large companies often have a huge cash flow, conventional wisdom is that they’re better suited to make acquisitions. The reality, though, is that small- and medium- sized companies are inherently more flexible, and so they’re better able to integrate faster on the engineering side. Furthermore, smaller teams means avoiding the constant churn of reorganization, while also offering greater opportunity for merged set of employees to have a measurable impact on the company culture.
Google is a great case study here. In 2003, it acquired Applied Semantics (ASI) to bolster its own search advertising product AdSense. Google quickly decided to establish its Southern California product development center in Santa Monica, where ASI was based. Within two years of the purchase, AdSense already accounted for 15 percent of Google’s revenue. At the time, the company had just 1,600 employees – by no means a startup, but just 4 percent of the 40,000-plus headcount it boasts today.
Compare that with today, when it takes far longer for Google to integrate its acquisitions – which also now have far less impact on the company’s bottom line. For instance, Google completed the purchase of Motorola in May 2012, yet only managed to release its first flagship device this month, more than a year later. And it likely will be many, many years (if ever) before value on par with ASI is generated.
Focus on the target company
Conventional thinking after an acquisition is to blend the target company’s products and brand entirely into your own. That’s a mistake. Companies stand a much better chance of success if they work closely with the target company to achieve a unified vision –even letting them run the show to some extent.
Take Amazon’s 2009 purchase of Zappos. Its teams worked with Zappos CEO Tony Hsieh to ensure that Zappos’ incredible company culture remained intact, in particular letting the smaller company maintain both its headquarters and branding. This actually resulted in more freedom for Zappos to further bolster its reputation for stellar customer service, which resulted in even more growth without disruption – and ultimately led to an enormous revenue stream for Amazon.
While I was at Zynga, we operated similarly while the company was relatively small. The acquisitions of MyMiniLife and Newtoy were very successful because we had a clear vision and strategic fit, allowing those companies to seamlessly integrate into ours and drive huge value in the form of FarmVille and WordWithFriends, respectively. This was all about allowing the target company to find their own best fit within Zynga from day one, and ultimately those two franchises became the core of Zynga’s business.
The main idea to remember when evaluating acquisitions is to be aggressive, sure, but also realistic. Pushing two companies with conflicting personalities together is never a viable strategy. By targeting companies with culture that is already similar to your own, you’re enabling the possibility of 1+1=3. It’s in many ways a delicate surgery — be patient, uphold a constant communication between all parties, and use precise metrics to back up your goals.
Guru Gowrappan is executive vice president of products, product operations, and marketing for app search engine Quixey. Previously he led M&A integration and was COO of Emerging Opportunities at Zynga; before that he worked at Yahoo! on more than 50 products, with a focus on mobile, monetization and global media.
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