Synergy rarely works in big acquisitions

Many times analysts talk about "synergy" and "leverage" that is sure to result from acquisitions. My experience is that small acquisitions (5 to 200 people) do in fact often result in synergy. I can only observe that large acquisitions, $1 billion and up, rarely result in significant synergy or leverage.  The Seattle Post Intelligencer has an interesting article about Microsoft acquisitions, comparing the size and number of acquisitions this year and previous years.

Synergy and leverage are descriptive words that always come out when a company overpays for an acquisition. I started my tech career at Digital Equipment. At DEC whenever something was "strategic" what they really meant was, it is not profitable. I think synergy and leverage often fall into the same category. Fancy words for "this acquisition will pay off somehow at some point" and that "1+1=3".  Remember AOL and Time Warner? Or Compaq and DEC? Years later they are still looking for the synergy.

Microsoft spent $650 million on 23 acquisitions last year and  about $207 million for 9 companies the previous year. This contrasts with more than $2 billion was spent on just three companies in 2003.   The Seattle P-I article points out that some of the smaller acquisitions like Onfolio, SeaDragon, and Massive have produced immediate results while the huge acquisitions like Great Plains and Navision are taking much longer to produce results and payback.

Another quote from the Seattle P-I article; "With smaller ones, what you're really buying is the technology that they've developed, and in some cases the people who are developing it," said Charles Di Bona, financial analyst at Sanford C. Bernstein & Co. "They're fairly straightforward investment decisions as opposed to all this 'synergy.' "

"I think when they look at what they paid for Great Plains and Navision, and what they expected from those businesses, and how long it has taken to integrate them into Microsoft, they'll be very cautious about big acquisitions for precisely that reason," said Matt Rosoff, analyst at the independent Directions on Microsoft research firm.

I would agree that smaller acquisitions are about people and technology. The Groove Networks acquisition brought us Ray Ozzie and lots of other talented people.  The Onfolio acquisition brought us JJ Allaire and his talented team.  Of course the larger acquisitions bring outstanding talent as well. But sometimes the large dollar amount overshadow the individual contributions.

In an earlier blog post I listed all the 2005 acquisitions, what they do, and the Microsoft group that acquired them.

Microsoft is not alone in seeing the value of small acquisitions. Google Chief Executive Eric Schmidt told reporters at a conference last month that Google buys companies at a rate of one or two a week, many of them as small as one to three people.

If you have a hot startup with innovative technology...gives us a call. Microsoft is ready to deal.

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Comments

[Scott Quick]

Check out Attensa. They might be a good fit.

[Jason Wood]

Don,

Great post as usual. I couldn't agree more relative to big acquisitions and the difficulty in generating the vaunted synergies that are touted to investors and employees at the time of the deal.

I went into this phenomenon quite a bit when Veritas and Symantec merged...it touches on some of the same ideas.

http://woodrow.typepad.com/the_ponderings_of_woodrow/2005/11/symantec_verita.html

Best,

Jason

[panasianbiz]

This was a wonderful discussion of synergy and leverage, with great analysis and explanation. I found your observations about smaller acquisitions, particularly the mention of Microsoft's smaller acquisitions, really fascinating!