Reactionary vs. Speculative Acquisitions: Buy Now or Buy Later?
It would appear that if the past few months are a foreshadowing of things to come in the tech space, there will be acquisitions— and lots of them.
As the media hoopla surrounding Facebook’s $19 billion purchase of WhatsApp calms down, there is still the ongoing debate, omitting Jan Koum and the WhatsApp team, whether the deal at that valuation was the right move for Facebook. Within the past few years there have been numerous acquisitions which have raised eyebrows due to higher than expected purchase prices or a purchase that seemed to not completely align with the acquiring company’s culture or business model (Google buying a thermostat company, Nest, for $3.2 billion).
All acquisitions, whether it is a move into a new market or alleviating unnecessary competition in the near future, occur to benefit the purchasing party. Although at the end of the day when an agreement is signed both parties have given away either ownership or money, the difference in a reactionary and a speculative acquisition could have great market and financial implications going forward.
Facebook’s acquisition of WhatsApp directly correlates with its 2012 acquisition of Instagram and its failed $3 billion attempt to acquire Snapchat in 2013. These high valuation attempts and acquisitions by Facebook are a result of changes in the market which would impact Facebook sooner then later
Instagram and WhatsApp have reimagined the possibilities of photo sharing and messaging, features which make up the Facebook platform, creating applications that have rapid product adoption combined with an enthusiastic user base. Facebook was not oblivious to the growth in these startups or the decrease in engagement on its own platform. The Instagram and WhatsApp acquisitions combined total almost $20 billion within a two year time span, acquisitions which Facebook hopes will strengthen its brand— but more importantly secure its current position.
This is the current state of the market. Companies execute a Warren Buffet-inspired investment strategy of buying and holding until the acquisition is valuable, or a company’s slowing innovation leaves room for competitors to mature resulting in an acquisition to buy back market share that they once possessed. Acquisitions are increasing because the market is constantly reinventing itself and many times startups that are linear in its approach can achieve what larger firms cannot.
The $155 million acquisition of Vancouver-based API security management firm Layer7 by software giant CA Technologies in 2013 became relevant as the company released its new suite of mobile API services at Mobile World Congress in Barcelona. When asked why CA Technologies acquired Layer7, a company that went through what Y-combinator co founder Paul Graham calls “the Trough of Sorrow” for many years resulting in a downsized to 46 members in 2009, Layer7 co-founder and current Senior VP of CA Technologies Dimitri Sirota stated “CA realizes that the mobile market is going to be a key concern for enterprises going forward. CA, as an organization that focuses on security and management, needs to be able to manage API’s as well.”
Since 2011, Layer7 has been profitable in the burgeoning API market where CA Technologies needed to stake claim as fast as possible with the rise of mobile applications, resulting in the Layer7 acquisition.
Marc Benioff, CEO of Salesforce, appears to advocate acquiring niche software services and moulding it into a Salesforce product. Being in the software-as-a-service space leads to numerous product possibilities evident through Salesforce’s purchase of Fredericton’s social media enterprise management firm Radian6 for $326 million and Toronto-based Rypple, which became Salesforce’s Human Resource service Work.com, launched a year after initial purchase.
Salesforce’s startup shopping spree over the past few years has led to some criticism from Wall Street, but it appears that the investments in Salesforce’s future were profitable as CEO Marc Benioff promises that 2014 will be a record $5 billion revenue year with estimates at $5.2 billion for January 2015.
Although these forms of acquisitions are company and market specific, reactionary acquisitions may cost more out of pocket but the revenue model and proof of concept of the acquired company enables a potential automatic cash flow. However, Google purchased newly launched startup Android in 2005 for $50 million but did not release the first Android device until 2008 while a few years earlier Reed Hastings approached Blockbuster to purchase his struggling movie service Netflix. Both of these brands are now multibillion dollar platforms, proof that sometimes it pays to speculate.
