In the past month, two major tech companies announced surprising deals.
The first – Microsoft’s $26 billion acquisition of LinkedIn. The second – Tesla’s $2.8 billion purchase of SolarCity.
Both LinkedIn and SolarCity as stocks have struggled this year, making them interesting acquisition targets. LinkedIn was down 40% before the deal, while SolarCity had dropped 60%.
In addition, though they have very different price tags, as a percentage of market cap, the two deals are relatively similar – the deal’s equate to roughly 6.5% for Microsoft and 10% for Tesla.
Analysts and Wall Street pundits will hash out the details over the weeks, months and years to come. But what is more important long-term are the insights that can be gained from looking at these deals from a strategic perspective, which clearly shows that Microsoft CEO Satya Nadella is making better strategic moves than Tesla CEO Elon Musk.
Acquisitions tend to fall into three core frameworks: (1) a company-centric acquisition that provides scale or additional capabilities; (2) a response to market developments, like changes in technologies and industry dynamics; and (3) a move to address evolving consumer needs.
A Ravenous Sinkhole
Tesla’s acquisition of SolarCity is a company-centric move that may, at least on the surface, seem to make sense – two green energy companies combining to create a healthier planet, from how you travel to where you live.
Complicating matters, however, is the appearance that the SolarCity bid is just a move to financially engineer Elon Musk out of a bad position. As the chairman of SolarCity’s Board, he owns more than 20% of the company – even financing some of his stock purchases with loans that use the stock as collateral.
Of course, Musk sees it differently, arguing that the combination of the two companies was a “no brainer.” On a call with analysts, Musk even went so far as to say, “I have no doubt about this – zero.” Investors disagreed. Tesla shares dipped more than 10%, a decline that essentially values SolarCity at $0.
While that level of confidence has worked for Musk as Tesla’s value gained five-fold in three years, it does not tend to work well in acquisitions. Blending two companies with different cultures, focuses and business models is a challenge even for the most seasoned CEOs.
With Musk embroiled in developing new technologies in new industries, he is creating an additional burden on Tesla that won’t add any possible value while trying to save Solar City.
Few would know that better than Microsoft.
In the past, many of Microsoft’s acquisitions involved buying hardware-centric companies, where the devices and equipment would create an audience of captive users on their software. Superficially, this strategy made sense as Microsoft looked to gain scale, something that Tesla is also looking to do. In reality, however, if was flawed because it forced Microsoft to follow the industry and make bets in highly-competitive categories where it had limited expertise and capabilities.
For example, in Microsoft’s $7.9 billion acquisition of Nokia’s devices and services business, the tech giant chased the market, desperately trying to make up ground in the iOS and Android mobile phone wars. The strategy, which rarely proves successful regardless of the acquirer, eventually led to more than $7.6 billion in write-downs.
How Microsoft-LinkedIn is Different
Contrary to its history and Tesla’s proposed SolarCity acquisition, the Microsoft-LinkedIn deal is not about ego. Instead, it is a consumer-centric move where Microsoft is looking at the landscape and projecting value it might add to users on a long-term timeframe.
Evidence of Nadella’s new thinking could be seen in the early press releases, as well as the decision to leave LinkedIn a separate entity.
LinkedIn CEO Jeff Weiner, in an interview, said he and Microsoft’s current CEO, Satya Nadella, spent a lot of time “riffing” strategically, a move that unearthed opportunities for both brands as better ways to serve their customers.
This is the type of thinking that enables brands to succeed in today’s insight economy. Consumers want brands to add value, solve problems and make life easier. In return, consumers will bond with brands.
Microsoft and LinkedIn aim to unlock efficiencies for their users by integrating Microsoft’s core business productivity tools with LinkedIn’s social resources.
Tesla and SolarCity don’t (yet) have a plan for customers. Instead, it’s a plan for Tesla and SolarCity. History has proven that to be a rough road.
Zain Raj is the CEO and president of Shapiro+Raj, a top-10 independent market research and insights firm in North America.