A critical component of the entrepreneurial ecosystem in the U.S. is the mergers and acquisitions market. I’ve sifted through a number of studies and estimates, and it’s safe to say that the vast majority (over 90 per cent) of the successful private company exits in 2011 and 2012 have been through company sale or M&A. (IPOs may represent a higher percentage of VC-backed company exits, but remember that only a minuscule proportion of all startups – even successful ones – are funded by VCs.)
What makes the M&A “engine” run, in a real sense, is the creative and innovative people on the big-company side of the fence who are constantly scanning the market for promising startups. Don’t roll your eyes. It’s what you might think of as a conscious innovation-thought-acquisition strategy.
Probably the prime imperative for Fortune 500 managers is to find areas for revenue and profit growth. But the challenge is to do so without endangering the existing franchise. Too often, the dilemma from the helm looks like this: You know you need to get into a promising new space, but it’s quite unproven and you suspect running two or three concurrent experiments might bleed cash for years. So in a real sense, you can’t afford – on a quarter-to-quarter income statement basis – to run too many such risky projects.
But if you let entrepreneurial startups run the experiments with their energy, time and capital – and let them ring out the technology risk and the market risk – then once a winner appears, you can buy that winner with capital off your balance sheet. The key is often to watch and wait until markets sort out, and business models are proven. Then success acquisitions are often the ones subjected to the most careful and sober-minded competitive and market analysis prior to pulling the trigger.
Innovation-through-acquisition can be a great growth catalyst and has become a crucial complement to internal, organic innovation in a growing number of industries. Let’s look a handful of examples:
Enterprise software vendors – which ring up $600 billion a year in sales – are closely following startups in growth areas such as social media for the enterprise and cloud computing to see who’s getting market traction, proving out a grounded business model, and so on … and then pouncing to acquire the strongest players.
Just so far in 2012, for instance, Oracle (Nasdaq: ORCL) has shelled out $1.92 billion for Taleo (an online recruiting platform); $300 million to acquire Vitrue (an enterprise social marketing platform) … and undisclosed sums for Involver (a social media development platform). … Collective Intellect (a social media CRM platform) … and SelectMinds (social recruiting tools).
Also in 2012, Microsoft (Nasdaq: MSFT) has plunked down $1.2 billion cash for Yammer (a provider of internal social network platforms for enterprises)… and undisclosed amounts for StorSimple (cloud-based storage)… and MarketingPilot (cloud-based marketing automation).
Even cloud-computing pioneer Salesforce (NYSE: CRM) has now grown to the point where they find it can be more expeditious to buy rather than make; a few months ago, they bellied up to the bar and spent $689 million for Buddy Media (a corporate social media marketing platform similar to Vitrue).
But let’s be clear: innovation-through-acquisition is a widely embraced strategy well beyond the traditional tech space as well. Let’s look at a few of diverse examples:
In April, blood management solutions company Haemonetics (NYSE: HAE) paid $27 million to acquiring Hemerus Medical, thereby adding some innovative blood collection and storage technologies to its portfolio.
In the once-hide-bound publishing space, for instance, two-century-old text publisher John Wiley & Sons (NYSE: JWA) recently announced plans to buy online degree services firm Deltak.edu to accelerate its move into online ed. Penguin, meanwhile, committed $116 million in July to buy Author Solutions to strengthen its presence in the self-publishing market.
And in biopharma, meanwhile, Acorda Therapeutics (Nasdaq: ACOR), a commercial-stage drug-development company, acquired Neuronex in February in a deal worth up to $130 million that gave Acorda access to Neuronex’s portfolio of development-stage drug projects. Driven by a similar motivation, Amgen (Nasdaq: AMGN) bought KAI Pharmaceuticals back in April for $315 million to access the company’s high-promise new drug candidates in cardiovascular disease and kidney disease.
M&A teams in big companies are often tiny – in many cases, we’re talking about a part-time job for a couple of talented folks. But increasingly, corporate leadership sees the benefits of slipstreaming off the risk-taking efforts of entrepreneurs to accelerate into challenging but promising new markets.
Jim Price is a serial entrepreneur and Adjunct Lecturer of Entrepreneurial Studies at the Zell Lurie Institute at The University of Michigan Ross School of Business. ©2012, James D. Price.
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