In response to our argument that big tech stocks won’t lead the next bull market, a number of commenters responded, arguing that big tech might be immune to disruption because with massive amounts of cash on hand these companies can buy the winners of tomorrow.
Of all the arguments in favour of big tech, this is by far the most specious. Sure, these companies have lots of cash as Breakingviews noted, but the idea that they can buy their way to prosperity is nonsense.
Consider a few points.
Disruptive technology is disruptive technology no matter who owns it. Sure, Microsoft (MSFT) could buy some lightweight, web-based Office competitor that charges no money. But then it just means Microsoft is cannibalising itself, which still means revenue collapse. Sure, some techno-idealists call on companies to cannibalise themselves, but actually doing so while maintaining gargantuan market caps doesn’t work.
Big tech can’t pick winners. It may seem obvious to you which companies are going to win out, but you’d be wrong. It’s highly unpredictable and fluid. And even young tech winners are constantly getting disrupted.
Growth acquisitions have a terrible track record. Quick! Name 5 acquisitions that have been big winners for the acquirer. We can think of a couple. EMC’s purchase of VMWare comes to mind. But for the most part, it doesn’t happen.
Bernstein analyst Jeff Lindsay recently listed a few big-growth, potentially transformative acquisitions. They haven’t turned out too well:
- Netscape: Acquired by AOL for $4.2 billion (arguably $10.8 billion at the close);
- AOL: Acquired by Time Warner for $120 billion (you’d be lucky to sell AOL for $3 billion today).
- ICQ: Acquired by AOL for $407 million.
- Skype: Acquired by eBay for $4.1 billion. Hefty $1.4 billion eBay writedown ensued.
- MySpace: Acquired by News Corp. for $580 million. That worked out because of a $900 million search deal with Google that won’t be renewed.
- YouTube: Acquired by Google for $1.65 billion. A $1 billion Viacom lawsuit ensued.
Obviously there are plenty more.
See, big think magazine writers and bloggers would love to fantasize that if only CEOs in ageing industries “got it”, then they could build, buy or self-cannibalise to thrive in the next generation. But if that were possible, you’d think they’d name, oh, one or two companies where it worked. Of course, the paucity of examples never seems to stop them from making the claims, but you don’t have to be fooled.