Will High-Tech Mergers Of The Future Take On A Whole New Shape?
While there are many reasons for these transactions, current activity is being driven largely by a lack of product innovation on the part of most of the companies on the buying side of the ledger, coupled with a desire to cash out quickly by those on the selling side.
The Groove and Ascential deals are also examples of consolidation that may make some strategic sense but that doesn't truly add a new competitive dimension to either buyer.
Looking forward, however, you have to wonder whether we won't eventually see some branching out and buyouts that push into different fields.
General Electric is an example of a multidimensional company that historically has used acquisitions to push into truly new businesses. As a result, the company drives profits from businesses that stretch from aircraft engines to toasters to financial services to network television and radio.
Might we begin to see something similar involving high-tech players? I think so.
Apple is one company that may be ripe for a buyout of a markedly different business or that could become the target of an acquisition itself. It wouldn't be hard to envision synergies driving a union between Apple and Sony. On the one hand, Sony has relinquished its leadership position in portable music to Apple, and it will be hard-pressed to leapfrog the Apple innovation machine. On the reverse side, were Apple to own Sony's content, it would gain a huge advantage in the sale of downloadable songs or, for that matter, video content.
Hewlett-Packard's purchase of Compaq gave it scale. But a buyout of a very different type of company could reshape HP's position in the consumer space. HP, like Apple, might benefit more from striking a deal to purchase a music or video content generator than by picking up another technology company. Its acquisition last week of Snapfish, an online photo service company, makes sense because of the natural synergies in photofinishing. Snapfish also provides storage of photo images, and that also has natural leverage for HP.
You might say the buyout of Time Warner by AOL is an example of trying something like this that didn't work. The reality is AOL isn't a technology company. It's a content company, as is Time Warner.
My point is that mega-mergers between like companies don't generally add shareholder value over the long haul. But mergers that push companies into truly different but strategically connected businesses have a better chance of doing just that. They also have a better chance of success because the talent being bought is markedly different from the talent the purchaser usually has in-house, so there is less political jockeying.
The chances for these types of mergers may be slim, but they are certainly plausible, and I believe they are more likely during the next few years than ever before. As high-tech companies such as HP move deeper into consumer markets, they will realize that recurring revenue isn't in hardware, it's in software. And in those markets, software is the content.
I'm not saying this shift is imminent; but it is inevitable. Whether it is a content owner and product builder such as Sony realizing it would benefit by taking a run at acquiring Apple, or it's Steve Jobs deciding his company's stock price is so high that he just might be able to gobble up Sony, remains to be seen.
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