(Charlotte, NC – October 23, 2017)
Buying Market Leaders –
This month we continue our series on six principles for successful acquisitions. Below, we elaborate on the fifth principle: “buying market leaders.”
Value trumps price: Corporate development teams often rule out an expensive market leader as an acquisition target in favor of a relatively cheaper tier-two competitor. However, Mike Volpi, former chief strategy officer at Cisco, implores corporate development teams to think less about price and more about value.(1) One of the best examples of this is Google’s $1.65 billion 2006 acquisition of YouTube, a market leader in online video streaming. Even though Google competed directly with YouTube, Google recognized that buying, rather than building, market leadership was its best option for success and was willing to pay a full price.(2)
Be willing to give and take: Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give. This is even more true when the target is the market leader. Valuations are likely to be higher, making it harder to earn a return on capital. If the acquirer brings a unique or complementary skillset that will enhance and improve the market leader, the likelihood of a successful acquisition improves.(3) In the Google example above, YouTube had not yet monetized its videos and was facing many legal copyright hurdles, but was the market leader in terms of technology and number of users. Google contributed its advertisers and lawyers, but allowed YouTube to maintain its separate identity.(2)
Value should be justifiable: Although buying leaders is often advisable, buyers should still apply caution and rigorous business, market and competitive due diligence. Even if a seller is one of the market leaders in a seemingly attractive market, it may not justify the valuation. In 2015, Microsoft wrote off its entire $7.6 billion acquisition of the handset business it acquired from Nokia the previous year.(4) In 2011, News Corporation sold MySpace for $35 million after acquiring it for $580 million six years prior.(3) In each of these examples, the market leader was able to extract a full price for potential future value from the transaction. Unfortunately, the future value never materialized for the buyer. It is imperative to recognize these types of scenarios and be able to walk away if your company cannot improve the combined entity’s competitiveness to substantiate such a valuation.
(1) Inc: 6 Rules for Strategic Acquisitions
(2) The Economist: Two kings get together
(3) Harvard Business Review: M&A: The One Thing You Need to Get Right
(4) The Verge: Microsoft writes off $7.6 billion from Nokia deal, announces 7,800 job cuts