of this anticipated revenue synergy involves creating or accelerating new products or services – rather risky synergy goals, but we'll see how Google considers and attempts to manage such risk.
Organizational Design
Third, organizational design plays a crucial role in M&A activity. For example, it's widely understood that unless deal integration efforts succeed, the premium or even the basic consideration paid for a target can evaporate. Some executives feel that this implies that integration efforts must necessarily be concluded rapidly, certainly within a year. After all, cash flows associated with an acquisition have time value, so the sooner positive flows are realized, the more valuable they will be.
Although rapid assimilation is the correct path for some deals, we'll see that one size doesn't fit all with M&A integration. In fact, there are numerous styles for successful integration, some of which require that targets be left alone for a considerable period of time after the deal closes.
Google has come to understand that there is not a holy-grail path to integration and utilizes numerous styles for its acquisitions in attempting to make a deal work. For example, consider Google's 2012 acquisition of Wildfire Interactive. Wildfire's technology enabled advertisers to serve campaigns on social websites such as Facebook, Google+, Twitter, Pinterest, YouTube, and LinkedIn. When Google acquired Wildfire, Jason Miller, a Google product manager, made this blog posting: “With Wildfire, we're looking forward to creating new opportunities for our clients to engage with people across all social services…social presence can complement all marketing campaigns – search, display, video, mobile, offline ads and more.”
As part of the deal terms, Google established a significant retention bonus in order to motivate Wildfire co-founders Victoria Ransom and Alain Chuard to continue leading the company's 400-employee team. Wildfire was left alone in an attempt to pursue key enterprise social marketing metrics that Google felt could be better achieved without immediate tight integration into a Google product group. There certainly was no guarantee that this integration approach would yield desired results, but Google apparently believed it would maximize the chances that it would.
In contrast, other acquisitions have been immediately associated with product groups within Google. For example, in 2011, Google purchased Green Parrot Pictures, a developer of tools for the manipulation of digital video and images. Almost immediately, Green Parrot's technology and team was attached to the YouTube group with the goal of helping users make flicker-free videos, particularly for videos taken with mobile phones.
Still other acquisitions become part of a collection with the goal of introducing a series of new product introductions. Consider the cluster of robotics acquisitions mentioned earlier. Google initially placed these acquisitions and its robotics initiative under Silicon Valley veteran Andy Rubin to explore greenfield opportunities based on the collective technologies from these deals.
There is much more subtlety in Google's approach to integration. Many of these efforts have been successful, but there are also notable failures. We'll devote Chapter 12 to exploring acquisition integration in detail.
Deal Dynamics
Finally, consider the deal dynamics dimension of M&A. This dimension includes designing the terms and structure of the deal. Will the consideration of the transaction involve cash, stock, or some combination? Will there be contingent consideration, payable to the target only if certain milestones are met? How about retention or stay bonuses for key talent? Will the employees of the acquired company need to relocate, or can they stay in place?
Consider some dynamics issues relating to Google deals. When Google purchased Waze, an Israeli crowd-sourced mapping and navigation company, the consideration was $966 million in cash. (Retention bonuses could increase this amount.) Google would use the technology to enhance its Google Maps with Waze's real-time traffic information. In closing this deal, Google allowed Waze personnel to remain in Israel. This concession was reportedly an important factor in Waze's decision to agree to the acquisition.
Google rarely uses its stock in making acquisitions, although it has done so in certain key purchases (such as Applied Semantics AdMob, and YouTube). However, going forward, Google might use stock more often in M&A transactions. After a stock split in 2014, the company has nonvoting stock to use as a potential acquisition currency.
Taking all four of these major activities (strategy, economics, organization, and deal dynamics) into consideration, the bottom line is that successful M&A activity is an intricate challenge. It is no small undertaking for a company such as Google to succeed in building an acquisition program that becomes a core strategic capability.
Evaluating Performance
M&A success rates for corporations are generally considered poor, although just how poor has been the subject of some disagreement. Some studies report the rate at which acquisitions fail to create value range to be 40 to 60 percent, while others assert a failure rate within an even higher range of 70 to 90 percent.8
Abstracting from a wide range of studies, Robert Bruner concluded: “The buyer in M&A transactions must prepare to be disappointed. The distribution of announcement returns is wide and the mean close to zero. There is no free lunch.”9 (Announcement returns involve event studies that examine abnormal returns to shareholders in the period of time surrounding transactions.) Bruner went on to further assert that negative performance post-merger is troubling, but suggested that more rigorous testing is necessary to draw firm conclusions about the returns after an acquisition is completed.
M&A activity performance has been studied extensively, with various schools of thought emerging.10 First, the financial economic school measures value creation and stock market returns around the time of a transaction. These studies are prominent in academic thinking, but are of limited use when the acquirer is private or when the acquirer engages in a small transaction (or series of small transactions) relative to its market capitalization. And such small acquisitions have long dominated for Google and other leading technology companies, as reflected in the practice known as acqui-hiring. Acqui-hiring, in general, involves the process of acquiring a company to recruit its talent, with or without being interested in the target's technology, products, and services. We'll examine various forms of the acqui-hiring phenomenon in Chapter 13.
A second school of thought involves evaluating the effects of strategic relatedness on M&A performance. Traditionally, this line of thought has argued that acquisitions enjoyed a higher likelihood of success if they were in some way related to the acquirer's current products or markets. Significant evidence has been presented that acquisitions involving unrelated diversification commonly result in lower financial returns than nondiversifying deals.11 Peter Lynch, well known as a mutual fund investor, went so far as to coin the term diworsification, implying that an organization that diversifies too widely risks destroying its original business, given the management energy and firm resources that are diverted from core activities.
The concept of strategic relatedness is highly relevant to our study of Google's M&A activity. While many of the company's targets have been related to its core ad-tech activities, other deals, such as Google's $3.2 billion acquisition of Nest Labs in 2014, offering smart home products such as smart thermostats and smoke alarms, might be considered as taking Google afield from its advertising center.
Not all companies that have used M&A to diversify have failed in this effort. For example, Berkshire Hathaway has been a notable success. We'll evaluate the likely performance impact
Bruner (2004), p. 63.
See Bauer and Matzler (2014) for a discussion of the major threads of M&A performance research.
