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.