Mobility News

Where have all the acquisitions gone? Permira buys Genesys

As we enter into uncertain economic time, I’ve noticed a disturbing trend in the tech markets – the spinco. Over the last decade, large vendors were spending millions, if not billions, of dollars making high profile acquisitions. At the time, many of these acquisitions were pitched to the market as “strategic” and “essential to our long term growth. Years later, these acquisitions are being unwound in private equity sales or flat out shutdowns. For example, HP bought Palm for $1.2 billion, only to shut it down less than 2 years from acquisition. Cisco bought a camera company called Flip only to shutter it two years later. Alcatel-Lucent has been rumored to have the entire enterprise business on the block and today it managed to spin off Genesys for roughly what it paid for it in 2000. This really begs the question were these acquisitions strategic? If they were defensive in nature, was the proper price paid? And is management being held accountable for their failures? Perhaps as an analyst, I should be happy about this. It creates news, market transition and confusion that is good for my business. However, I’m in fact disgusted. As an industry and as a country, we’ve become lazy in our budgeting and our spending. Acquisitions have also become a way for large firms to get away with limited internal product innovation and as a way to make it appear that a company is pacing with market change. In fact, these companies are just spending money on acquiring companies that may or may not bear fruitful outcomes.

Companies must be more diligent in developing expansion plans or risk a downward spiral of financial disaster. Are there actual synergies with your current business and what you are buying? Will your customers and prospects consider this a logical extension of your product and brand or is it a new market? If the acquisition is disruptive to your existing portfolio (a replacement for your product) are you willing to actually cannibalize your own product? If not, why bother. Furthermore, a company’s board should be taking a more aggressive stance on the validity of these acquisitions. Is the acquisition actually good for the company? I’m not saying you shouldn’t retrench if an acquisition doesn’t make sense. If we want to create jobs, shareholder value and viable long-term businesses, we need to make strategic plans that span beyond a three to six month Wall Street profit window. We also need to question whether the businesses a company is buying for $500 million or more will actually produce a reasonable return on that investment. And what is that return? It isn’t a shut down and it isn’t selling it for roughly the same amount you paid for it. If we want to take a risk, perhaps we should price that risk into the acquisition price and pay less. Finally, a company needs to actually have a vision of where it is going and buy appropriately.

I’m happy for the Genesys folks. The Permira acquisition provides an opportunity to focus and restructure appropriately. There is no doubt it will be spun again but hopefully the outcome will be more focused.

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2 Responses to Where have all the acquisitions gone? Permira buys Genesys

  1. Paul Sweeney says:

    Firstly, great that someone actually cares that billions of dollars seem to be thrown away every year on poor M&A. Study after Study shows that it destroys value, yet “the street” continues to reward it. Innovation, Investment, and potential for social impact come in a long second. Yet, as you point out, the Innovation Engine is the source of long term value. The place that value occurs is in society, in the things we do every day. Sure, we get smart and shiny ipads as one end of the scale, but we also get Open Source Platforms for Crises Management on the other. This Other is also being termed “Thick Value”, it is value rich in meaning. See @umairh The New Capitalist Manifesto. And no, it’s not “new hippy crap” but about cycles of sustainable growth. Show me M&A based on developing cycles of sustainable growth and I’ll show you a great investment opportunity.

  2. Adrian says:

    Great post – I think one issue is that you may be talking about at least two distinct groups and conflating them with a single “we” here: “If we want to create jobs, shareholder value and viable long-term businesses”

    The corporation wants to create shareholder value, and often looks at it a quarter at a time (from the CEO perspective). The BOD should take a longer horizon into consideration, but we’ve seem some pretty poor BOD performance in tech lately, from incompetence to negligence. The question is which “we” cares about creating jobs? To hear some politicians, it is all the wealthy people, but that’s silly. Pure capitalism requires the business to reduce costs as much as possible, which generally means the lowest possible human capital costs.

    Society typically benefits from more employment, but unless corporations make the link between employment and revenue, an outside force (regulation) may be necessary. In 1914, Henry Ford decided to pay his workers $5/day, about double the previous rate, and to shorten the work day from 9 to 8 hours. It wasn’t altruism, it was smart. He was then able to run 3 shifts, lower turnover, and turn his employees into customers. We could use that kind of vision today. The churn caused by tech speculation may be causing long term harm as places like silicon valley lose the essential skills for the future, but it’s often hard to see beyond the next quarterly report.

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