This article has been written by Himanshu Agarwal, Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.
It has been published by Rachit Garg.
Table of Contents
Introduction
Merger and acquisition (hereafter referred to as M&A) is becoming one of the most prominent aspects of organisations. Companies have started exploring synergy with other organisations, which results in M&A. This article focuses on the technological performance of M&A, which is related to Hi-Tech sectors. In the early days, the computer industry was considered the only Hi-Tech industry. However, the use of artificial intelligence in various fields has changed the definition of the hi-tech sector in the current scenario. The article focuses on the notable M&A transactions of the year 2022 and historical successful and failed M&A transactions.
After comprehending the aforesaid M&A transactions, some observations have been noted, i.e., reasons for the spurt in M&A activities, reasons for failure and shortcomings of the M&A. The conclusion of the article is that M&A plays a vital role in achieving economies of scale, gaining competitive advantage and overcoming the shortcomings of the company.
After comprehending the aforesaid M&A transactions, some observations have been noted, i.e., reasons for the spurt in M&A activities, reasons for failure and shortcomings of the M&A. The conclusion of the article is that M&A plays a vital role in achieving economies of scale, gaining competitive advantage and overcoming the shortcomings of the company.
About the Hi-Tech Industry: In this fast-paced society, all sectors are witnessing technological advancements that are unmatchable. Technological advancement has ensured better cross-border communication, mobility, healthcare, education, the way we work on an everyday basis, etc. All these technological advancements are a boon for Hi-Tech industries.
The Hi-Tech industry, also referred to as the technology industry, includes and is not limited to industries engaged in research, development, manufacturing, and distribution of technological products, services and solutions. The need for these industries can be witnessed in sectors like telecommunications, software development, computer hardware, artificial intelligence, internet-based services, robotics, and many more.
The Hi-Tech industry’s contribution to the national GDP:
- Job creation and economic growth.
- Innovation and advancement would enhance the overall quality of life.
- Companies, organisations and countries with better technological advancement have a competitive edge on a global platform.
- Better cross-border communication.
In a nutshell, Hi-Tech industries have a vital position in the world today for the various aforesaid reasons. To gain a competitive edge, many organisations adopt M&A. Organic growth sometimes becomes a hindrance to gaining competitive advantages.
Notable technology sector mergers and acquisitions globally in 2022
Google’s acquisition of Mandiant
Type of deal: Acquisition
Approx. deal size: US$5.4 billion
Background of the deal: Google, an internet-based company, is expanding its footprints on the cloud platform. Today, world hacking and cyber security challenges have increased severalfold. Despite the growing security concerns, Google made a big announcement that they would keep the data and infrastructure of the to-be customers and existing customers safe with them.
Significance of the transaction: Mandiant is a cyber security firm. To strengthen the commitment and bring more confidence to the Google customer base, this acquisition was announced. The acquisition will strengthen the end-to-end security operations suite.
Vista Equity Partners’ and Evergreen’s acquisition of Citrix
Type of deal: Acquisition
Approx. deal size: US$16.5 billion
Background of the deal: Vista Equity Partners is a leading investment firm, exclusively investing in software, data and technology-enabled organisations.
Similarly, Evergreen is an investment firm and affiliate of Elliott Investment Management LLP, which also focuses on investment pertaining to technology-enabled companies.
Significance of the transaction: Industry experts believe that Vista Equity Partners’ existing company, TIBCO, combined with Citrix Union is very critical. Key figures of the combined entity are:
- One of the largest software development companies in the world.
- The customer base of 4 lakhs covers 98% of Fortune 500 companies
- The user base is 100 million in ~100 countries.
Microsoft’s acquisition of Nuance
Type of deal: Acquisition
Approx. deal size: US$19.7 billion
Background of the deal: Microsoft is one of the oldest technology firms that develops, manufactures and sells computer software, licences, varied industry solutions, etc. The presence and use of artificial intelligence (AI) are increasing in the day to day life. Microsoft is developing many solutions around this concept and technology.
Significance of the transaction: Nuance is a technology company providing various applications that are AI-based to industries in various sectors like healthcare, financial services, retail and telecommunications. This acquisition will provide a competitive edge to Microsoft’s cloud platform and strengthen the company’s presence in the healthcare sector.
Adobe’s acquisition of Figma
Type of deal: Acquisition
Approx. deal size: US$20 billion
Background of the deal: Adobe is a digital design firm engaged in design and marketing. In the last few years, the company’s core business has experienced a slowdown because of new edge design tools. Adobe has started exploring other avenues and new ways of generating revenue.
Significance of the transaction: Figma is a web-first collaborative design platform positioned as a serious competitor to Adobe’s core business. Adobe’s new acquisition will strengthen its portfolio and also ensure solid profitability. Moreover, Adobe has not invested much in this field, so it was prudent for the company to acquire Figma.
However, it has been reported that there are some serious regulation concerns, which can even jeopardise the transaction.
Orange’s merger with Grupo MásMóvil
Type of deal: Merger; 50 – 50 joint venture
Approx. deal size: Combined enterprise valuation of €19.6 billion.
Background of the deal: Spain’s mobile market has four telecom operators with market shares in the range of 21 to 28%, respectively. The sector needs a significant amount of investment for 5G in terms of customer acquisition and infrastructure upgrades.
Significance of the transaction: Orange and MásMóvil, having 2nd and 4th positions in the market, joined hands together to gain the 1st position in the Spanish telecommunication market. The combined entity will have the financial capability to scale up the investment in FTTH and 5G, which would be fruitful for the Spanish customers.
Elon Musk’s acquisition of Twitter
Type of deal: Acquisition
Approx. deal size: US$44 billion
Background of the deal: Elon Musk, the world’s richest man, holds a 9.1% stake in Twitter. He was the largest stakeholder, which compelled him to accept an unsolicited offer to buy the platform.
Significance of the transaction: Musk’s strategy was to ensure free speech worldwide. After his Twitter acquisition, Musk tweeted that the bird is free now. However, considering the current situation of the company, it seems the new owner is confused or finds it difficult to run the company.
Microsoft’s acquisition of Activision Blizzard
Type of deal: Acquisition
Approx. deal size: US$68.7 billion
Background of the deal: Microsoft is one of the oldest technology firms that develops, manufactures and sells computer software, licences, varied industry solutions, etc. Computer games, console games and cloud games are gaining significant popularity among the young generation. Earlier in the year 2021, Microsoft acquired Bethesda, a gaming firm.
Significance of the transaction: Activision Blizzard is one of the world’s most valuable companies. This acquisition makes Microsoft 3rd largest gaming company by revenue, behind Tencent and Sony.
Notable technology sector mergers and acquisitions Indian deals in 2022
In 2021, there were many companies that diluted their non-core assets. A similar trend was observed in the year 2022 in the domestic market. Most of the domestic transactions were observed in the IT space. The IT space strengthened its dominance in the market by acquiring smaller companies. Some of the notable M&As in the markets are as follows:
Reliance’s acquisition of majority stake in Addverb
Type of deal: Acquisition of 54% stake
Approx. deal size: US$132 million
Background of the deal: Reliance is a multi-billionaire conglomerate with an interest in Telecommunication, Finance, Retail, Petroleum and Energy, technology platforms, etc. The company is expanding its footprints on the new edge technology platforms.
Significance of the transaction: Addverb Technologies is an Indian startup in the robotics space. They provide building automation and robotic solutions for warehouses and factories. Reliance has been using the services of Addverb Technologies, i.e., pick-by-voice software, robotic conveyors and semi-automated solutions in the warehouse. Addverb technology generates ~ 80% of the revenue from the domestic market and with Reliance’s resources, they would look to expand the domestic market exponentially and may foray into foreign markets.
HCL’s acquisition of a majority stake in GBS & Star Schema
Type of deal: Acquisition of 51% stake
Approx. deal size: US$42.5 million
Background of the deal: HCL Technologies (HCL), a leading technology company in the world, is providing solutions to transform industries into next-gen enterprises. HCL offers IT and business services, engineering and R&D services (ERS) and products and platforms.
Significance of the transaction: Starschem is a leading provider of data engineering services. Other than data engineering services, the company also provides consulting and technology to Global 2000 companies in the U.S. and Europe. As per industry experts, this is a strategic acquisition by HCL. It will foster the company’s growth in the field of data engineering and strengthen its position in Central and Eastern Europe.
Infosys acquisition of Oddity
Type of deal: Acquisition of 51% stake
Approx. deal size: €50 million
Background of the deal: Infosys is a global leader in the next generation technology, consulting and digital services. Infosys, in its four decades journey, has expanded its service offerings. Earlier, Infosys had acquired WONGDOODY, a creative agency providing an experience-and-design platform to Infosys. WONGDOODY’s prestigious client list includes some of the most notable industry names, like Amazon, Honda, and other Fortune 500 companies.
Significance of the transaction: Oddity, a German digital marketing company, has a strong presence in digital communication and commerce agencies. Oddity provides a ready setup of digital commerce, marketing knowledge, and the metaverse to Infosys services. WONGDOODY and Oddity, Infosys will witness technological transformation in the coming years. Moreover, it will strengthen Infosys’ presence across the European and Chinese markets.
Failed M&A in history
M&A is considered a strategic step for the future growth of a company. The acquirer or merged entity aims to create value for the company and for the clients. However, all the M&A does not yield the envisaged results. The article aims to observe these falling-out deals to comprehend the key reasons that dispel M&A.
America Online and Time Warner
Type of deal: Merger
Approx. deal size and Year: $165 billion in the year 2000.
Background of the deal: The merger strategy was considered a sound strategy by most industry experts as it enabled Time Warner to use AOL’s customer base of tens of millions and also allowed AOL to benefit from the cable network of Time Warner. Time Warner had book, magazine, television and production capabilities and merged with AOL’s millions of internet subscribers to form the ultimate media company in the world.
Reasons for the failure: Some of the key reasons cited by industry experts for the failure are:
- The deal took place when dot com industries were booming; however, the dot com bubble vanished by the end of the deal. AOL suffered huge losses.
- A significant amount was spent on advertising, which yielded minuscule results.
- Cultural differences between the companies were a major roadblock to their smooth functioning.
End result: Both companies hereto separated into two firms in less than a decade from the date of the deal.
Sprint acquired a stake in Nextel Communications
Type of deal: Acquisition of a major stake.
Approx. deal size and year: $35 billion in the year 2005.
Background of the deal: The United States telecommunications market had two fierce competitors, Cingular Wireless and Verizon Wireless. Sprint acquired the major stake in Nextel Communication, making the combined entity the 3rd largest telecommunications player in terms of customer base. The combined entity hoped to grow by cross-selling products and services to a newly acquired customer base.
Reasons for the failure: Some of the key reasons cited by industry experts for the failure are:
- Poor due diligence before acquisition
- Both companies used different technologies, which apparently made it difficult to integrate or make a common platform.
- Both companies had different strategies for customer acquisition and marketing. There was constant rift and dissatisfaction between the employees.
- Cultural differences and incompatibility between companies added fuel to failure.
- The aforementioned differences resulted in a loss of customer base and poaching of senior employees by competitors.
End Result: In April 2020, T-Mobile acquired a 100% stake in Nextel and completed the merger with Sprint.
Status of the tech industry and startups globally and key reasons for the M&A deals
The tech industry is growing at a fast pace; many industry experts believe all companies want to stay abreast of the new developments. Fear of losing out, like Sony, Nokia, or even Kodak, is again and again cited in the tech industry. One way of moving faster is by spending heavily on R&D or acquiring a new startup that has done enough R&D or has gained significant market dominance.
After comprehending various historical and recent M&A deals in India and globally, these are the key reasons for the M&A deals:
- Gaining market share: When two companies merge, or one acquires another, the combined entity aims to acquire a customer base in the existing region or gain a customer base in the other regions. For example, in the deal in 2022 for HCL’s acquisition of a majority stake in GBS and Starschema, similar reasons were witnessed. HCL gained a significant position in the European region. The combined entity will gain immensely; however, some risks are associated with such M&A.
- Access to new technology: One of the biggest bets in M&A is on gaining new technology. The traditional way of developing R&D labs takes time and competitors have already gained the edge. It may also happen that some other technology makes the developed technology obsolete.
- Economies of scale: A combined entity can produce the product and services at a lower rate or new products and services can be pushed to the existing customer base. Pushing new services and products into the existing customer base means lower acquisition costs for the new customer base.
- Improved competitive position: A combined entity gains a dominant position in the market and is better placed to compete with competitors. This assists them in acquiring new customers and growing their business quickly.
Why are tech- startups resistant to M&A
Overall, M&A is seen as one of the best bets in the tech industry for growth in terms of market share and revenue growth. Tech startups see themselves as different from larger organisations in terms of innovation, flexibility, working culture and growth strategy. Hence, many startups are reluctant to do M&A deals. Will comprehend the factors for the resistance in detail:
- Disruption: Tech startups consider themselves disruptors in the technology world. They believe they can achieve more and become established organisations in a short span of time. They will have limited upside if acquired or absorbed into larger organisations.
- Cultural difference: Typically, startups have flexibility in terms of dressing, communication and timing, which can be difficult to match with larger organisations. For example, one typical trend in Indian companies is using “Sir or Madam” for seniors. In America, companies and startups use individual names instead of using Sir or Madam.
- Loss of control: A young entrepreneur wants to maintain or remain in control of the organisation, which is impossible if combined with larger organisations.
- Valuation: From a financial perspective, it makes more sense for startups to go public, as they would fetch a higher valuation compared to associations with larger organisations.
Some factors make startups resistant to being acquired or merged with larger organisations; however, this is not true for all. At the end of the day, each startup contemplates all possibilities before making any decision.
Reasons which are a roadblock for the combined entity
Earlier in this article, some of the failed M&As were mentioned. Comprehending the reasons and background of the deal, the following reasons should be factored in before the M&A announcement or completing the M&A:
- Educate the employees about M&A: Employees are a resource for any organisation; the combined efforts of the entrepreneur and the employees lead to a desired outcome. Hence, it is prudent to educate the employees about the need for the deal, the outcome of the deal, their position post-deal and most importantly, assurance about a bright future.
- Cultural difference: Many of the combined entities failed to perform because of cultural issues, which may be due to language barriers, organisational structure, or maybe the way of working.
- Financial due diligence: Listed companies and larger companies employ independent auditors and are transparent in their conduct. However, the same may not be true for startups; a similar scenario was observed in the HP and Autonomy deal. Embezzlement of company funds, inflated sales and dubious bills are some of the common anomalies observed.
- Regulator or government policies/ regulations: Few deals took time to complete because of government regulations. It is best to check regulations or hire domain experts before a handshake or public announcement.
- Technological difference: All companies have their own preferences when selecting technology for the organisation. This is specifically true with software development companies, as the market is flooded with various computer languages like JAVA, Python, Scala, Ruby, etc. Sprint and Nextel communication used different technological platforms and never witnessed alignment between them.
- Big fat valuation: In some cases, deals were signed at inflated valuations, which led to financial instability post-deal. Losses are balanced by increasing product and service rates, cutting employee expenses or cutting marketing expenses. The end result is not in favour of the new company. Industries believe a similar situation is happening with Elon Musk’s acquisition of Twitter. However, time will tell the outcome of the deal.
Conclusion
This industry has witnessed unprecedented growth and fierce competition in the last decade. A similar trend is anticipated in the coming years. Artificial intelligence may become a dominant technological advancement in the coming years. Hi-tech companies need to be agile and adaptive; otherwise, sooner or later, they will perish. One way for these companies to grow is through mergers and acquisitions (M&A).
M&A activity in the tech sector is on the rise, and the coming years may witness a better trend than now. M&A allows companies to reach economies of scale, exploit new markets, acquire a new customer base, and develop new product and service offerings. Some of the most successful M&A in technological spaces are:
- Google’s acquisition of Fitbit in 2020
- Apple’s acquisition of Beats by Dyre in 2014
- Google’s acquisition of Nest in 2011
- Walmart’s acquisition of Jet.com in 2016
- Cisco’s acquisition of AppDynamics in 2017 transformed the entire company from hardware to software and service provider.
A list of successful M&As will go on. Not all M&As provide fruitful results, and there are some risks associated with the M&A. It is prudent to remember the goal of the M&A and the outcome anticipated. Finally, any M&A must have realistic expectations and proper due diligence before proceeding with the M&A.
References
- https://www.merit.unu.edu/publications/rmpdf/2000/rm2000-010.pdf
- Top 10 technology mergers and acquisitions deals in 2022 | Technology Magazine
- Top 11 Mergers and Acquisitions Failures of All Time | LinkedIn
- The 8 Biggest Mergers and Acquisitions Failures of All Time (dealroom.net)
- Top tech mergers and acquisitions in India in 2022 (so far) (analyticsindiamag.com)
- Ahmedabad IT firms on acquisition spree | Ahmedabad News – Times of India (indiatimes.com)
- Vista Equity Partners and Evergreen Coast Capital Announce the Completion of the Transaction to Acquire Citrix Systems and Combine It with TIBCO Software | Business Wire
- Adobe’s $20B Figma acquisition falls on UK antitrust radar | TechCrunch
- Microsoft is acquiring Activision Blizzard in shocking deal | Digital Trends
- HCL Technologies Acquires Hungarian Data Engineering Services Company Starschema | HCLTech
- Infosys Oddity Deal: Infosys completes acquisition of digital marketing firm Oddity – The Economic Times (indiatimes.com)
- Alcatel to buy Lucent for $13.4 bn | Latest News India – Hindustan Times
- The HP-Autonomy lawsuit: Timeline of an M&A disaster | CIO
- The Biggest Tech Mergers and Acquisitions of All Time | PCMag
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