ON ANOTHER REASON INCUMBENTS LIKE MICROSOFT BUY STARTUPS

SHOW AND TELL

(UPDATE:  Paul Kedrosky disagrees wtih Dare's original post)

Microsoft's Dare Obasanjo has a great post up this morning titled "Flipping your startup 101", outlining the key reasons why a GYMAAAE company might want to acquire a promising startup.  Microsoft uber-blogger Robert Scoble has an interesting supplement to Dare's post, along with some great posts by Don Dodge, yet another voice from Microsoft.

The posts are part of a discussion thread on startup acquisitions on memeorandum, started by Om Malik's post yesterday on the VC funding secured by Ajax/IM startup Meebo.

Dare's view is that:

"...there are three reasons why one of the major players would buy a company; users, technology and people."

Don Dodge, another senior Microsoft blogger, who also has a terrific post ("Microsoft will acquire my company")  in this discussion, punctuates Dare's post with the summary:

"Real estate investment is all about location, location, location. Technology investment is all about people, people, people."

Although there are countless variables that come in to play when a company acquires another one, there is one very important variable that's missing in the above discussion thread, especially for a PUBLIC acquirer, and/or private companies aspiring to soon be public.

At the risk of being a blind man describing an elephant, I'd submit that the important variable is WALL STREET.  Or more to the point, INVESTORS, public and private.

As someone who spent a career being an intermediary between technology/internet leaders like the GYMAAAE companies and wall street investors, I'd highlight that acquisitions large AND small are also about influencing and molding investor perceptions, both from a defensive and an offensive perspective.

It's not just about making one's stock go up, but about preserving absolute and relative growth multiples.

Often it's a way to quickly signal to large, institutional investors, that the company is ON TOP of a major trend, and is actively pursuing a strategy to catch up with a first mover. 

Many times, the acquisition is a placeholder that can be pointed to in investor meetings, so that management can say, "see we know this is an important area, and we're doing something about it".  This is especially true when the acquiring company may have NO intention of bringing the acquired company's product or service to market since it may compete with existing product lines and/or business models.

Occasionally, it IS about gaining a faster time to market, using the technology and people to affect meaningful change internally.  Examples here include Yahoo!'s acquisitions in the Web 2.0 area, with Flickr being the poster child, and Microsoft acquiring Ray Ozzie's Groove Networks.

But in almost all of these cases, it's about continually crafting the company's "STORY" as understood by Wall Street, to be told and re-told  countless times, both by the company directly and indirectly via analysts, conference "show and tells", and of course the business and mainstream media.

Of course the company doesn't have to be public to have these motivations, since crafting the story is an ongoing, evolutionary part of startups pitching to important customers, prospective investors and industry partners.

Many times, the acquisition ultimately gets taken over by the previously NIH (not invented here) forces that earlier may have been against the idea, but then essentially assimilate the new company, morphing the seed product or service into something that then becomes their very own, "home-grown" iteration.  The founder/founders then often leave the company as soon as their options vest.

Microsoft is a great case study here, given that they've been around for three decades, and been through all the major technology cycles.  One could say their business model really didn't even begin to click until they bought the company that then became MS-DOS, which in turn got them the famed IBM relationship.

As Don Dodge pithily describes it in his earlier post:

"The first, and most important, acquisition was QDOS from Seattle Computer Products which became MS-DOS. What kind of companies does Microsoft acquire? How do they decide to acquire versus build internally?

...lets start with a review of some of the most successful Microsoft acquisitions. Some of these may surprise you.

• QDOS became MS-DOS
• ForeThought became Powerpoint
• SoftDesign became Microsoft Project
• Vermeer became FrontPage
• PlaceWare became Live Meeting
• Vicinity became a key part of MapPoint
• nCompass Labs became Content Management Server
• Bungie Studios became Halo
• HotMail
• Visio
• Great Plains
• Groove Networks"

He could have mentioned Spyglass, which Microsoft DID NOT acquire, but licensed technology from, to ultimately build a version of Internet Explorer that would help slay Netscape.

More often than not, acquisitions are REALLY ABOUT feeding a different dragon called Wall Street, keeping it happy, or at the very least, at bay.

Comments

[Don Dodge]

Michael, Great post!! I subscribe to your blog so I get to read your insights everyday. It is interesting how we all have deep insights based on different perspectives. Your Wall Street experience, blended with your technical understanding is an incredibly important perspective.

Thanks for leading the discussion today, and everyday.

Don Dodge

[Jason Wood]

Michael,

Fantastic take on an oft-discussed issue. I find your thoughts in line with my own, although admittedly the near-term results suggest there remains a disconnect between these actions and the reaction of the investment community.

Yahoo! has arguably shown themselve to be at the forefront of embracing the long-tail of late [del.icio.us, Flicker, Yahoo 360, Six Apart SMB agreement, etc...] yet the stock has hardly been rewarded.

Similarly, Google isn't being rewarded for the major moves of late [Music, Classifieds, Base, etc...] although to be fair GOOG stock has already been a rocket ship this year.

And Askjeeves and IAC, both secondary but important players in the Web 2.0 M&A market certainly haven't been given a boost by investors as a result of their activities.

Keep up the great work,

Jason