It’s common knowledge in academic circles that acquisitions seldom provide the benefits that acquirers initially expect. Most researchers blame this on a principal-agent problem, where executive incentives diverge from shareholder interests.
That can take two major forms: The first is executives awarding themselves major bonuses for making deals go through. The second is manager demand for higher salaries that come with larger fiefdoms and more cubicle serfs.
But there’s another school of thought blames executive hubris for synergy disappointments. The theory is that executives systematically over-estimate their ability to unlock the potential of corporate assets. They believe that they are superior managers than the schmoes running the acquisition target. Call it a crime of excessive self-esteem.
Yet deals keep getting done.
One might argue that Silicon Valley startup transactions are different. This isn’t large company X buying slightly less-large company Y after all. Instead, acquisitions are a way to keep the innovation flowing, a form of outsourced research and development.
In my younger and more impressionable days, I interviewed NetApp’s Dan Warmenhoven about his acquisition of a security startup called Decru. I had learned somehow that the purchase price was 45 times the startup’s trailing 12-month revenue—a shocking premium to the younger me. I wanted to know exactly how Warmenhoven had justified paying so much.
To his credit, he humored me with a well reasoned answer. He said he’d run the numbers and estimated that it would have cost $200 million for him to create the technology internally over a matter of years and that his competitors might win that market in the meantime.
He told me that Decru’s 12-month trailing revenue was an important proof point that people wanted its service, but that he anticipated improving sales by as much as five times in the coming 12 months just by plugging the product into NetApp’s existing sales channel and pushing it through the several hundred salespeople he had working worldwide.
It was a level-headed rationale that sent my skepticism packing.
Yet I have no way of knowing whether he did the right thing. You can trace Decru’s technology into NetApp’s DataFort series of products, but was it worth the acquisition price?
And what of the acquisitions that have outright failed? How would you find them or judge them?
Google’s acquisition of Dodgeball is often cited as an example of the search giant’s inability to effectively integrate its acquisition targets. But maybe the company did the deal for other strategic reasons, like it wanted to squash the location-based business until it could offer some major play in it. What’s that worth?
Or eBay’s acquisition of Skype. I remember writing about it when that deal went down and thinking what an insanely high price had been paid. But I never took the time to carefully consider how these two companies were going to find synergies. Neither, it seems, did anybody at eBay.
“One plus one” never made it up to “three” in this case. In fact, the consortium of private equity and venture capital buyers that spun it out seemed to think that “one plus one” didn’t even make it up to “two.”
It’s all but impossible to say if a corporate acquirer overpays when deals are justified with promises and pixie dust instead of rigorous cash-flow analysis. Without any transparency or long-term accountability, we’ll never know if acquisition prices are justified. Yet some deals stink so bad that you can smell them even after they’ve been swept under the carpet.
I want to know: what are the worst startup acquisitions ever?