It seems that cash rich companies in the tech space are forever gobbling up younger and smaller organizations. There is actually an eco system of tech startups that are built specifically to be consumed by one of the behemoths (hopefully.) In many cases, there is a lot that can be learned by whom is buying whom. Let’s take a look at some recent examples, and my take on the strategy behind the buy…
Let’s start with a big one first – the Microsoft purchase of Skype for $8.5 billion. I have already perused a number of pundits talking about whether it makes sense or not. It seems pretty obvious to me it makes lots of sense. Now, they seem to have overpaid, but that always proves out in the long run. As to the strategic side of things, Microsoft has lots of cash – more than most small countries. They have to spend it on something. If you don’t buy someone, you either have to hire lots of people and spend it on new products, or give it back to shareholders, and very few boards are excited about handing lots of profits back to shareholders. So when you have to spend a few billion to buy something, why not buy a company that has lots of upside potential, already is the leader in their space, and brings a set of technologies that can be integrated into your other products to make them better. It makes a lot more sense for Microsoft to buy Skype than it did when eBay bought them. Besides, their core markets are starting to age, and weaken. Plus, they have been bleeding cash in the attempt to make money in the online services space. Adding a crown jewel like Skype just good optics if nothing else.
So what did it mean when Salesforce.com bought Radian6? This also makes a ton of sense. Salesforce sees the writing on the wall as to the merging of CRM and social technologies as a sales tool. Radian6 has good capabilities for mining social conversations and reporting on what it finds. Salesforce can use that mining capability by merging it with the contacts in their customer’s databases so they can listen to customers online conversations and mine them for buying signals. What we now call social CRM, will just be CRM in a few years so they jumpstarted their foray into that world by acquiring one of the largest players. Again, at a purchase price north of $300 million, they probably overpaid. There seems to be a trend with that these days.
Twitter bought TweetDeck for around $30 Million (although I also heard $40 million.) This makes sense as well because it allows Twitter to start consolidating some of the tools that are used to actually use Twitter in the real world. The raw Twitter Website is great for joining the real time news service river, but it was miserable at giving us tools to manage that river. Tweetdeck solves that. I also think Twitter over paid for Tweetdeck, but not for the reason some people say. I think what it shows is that Twitter as a company has little ability to build their own applications, or they would have simply spent much less and built their own application. The bad news about this is that Twitter is likely spending more time and energy figuring out how to maximize their revenue potential, than actually building new technology that would expand usage.
In all three cases, I give credit to the leaders for adding important new pieces. They get minus points for the price paid, but again, you only know what kind of deal you got after a few years. I don’t expect the acquisitions to stop on the tech space, and I fact expect them to speed up. As the large cash generating companies get larger and richer, they will more aggressively mine the startup and young company space for accretive technologies, and missing pieces. As their cash cows begin to lose their luster, they will grab companies on the rise to offset the downward trends they invariably run into. This is actually a pretty healthy system for our economy, and it is always fascinating to see who is adding what pieces and why…