It is a fairly well known fact in the business community that the majority of mergers and acquisitions are a failure when it comes to increasing shareholder value, benefiting customers or any of the other metrics that are used to judge the "success" of an acquisition. Whenever you read a news story about some startup being acquired or two large companies merging, there is a greater than 50% chance that the resulting product or company will be of less value to customers and shareholders than if the deal had never happened.
When it comes to software company acquisitions, there are additional factors working against success that go beyond the typical laundry list of reasons that are given for why M&As usually result in failure. With technology company acquisitions not only are there a minefield of people and financial issues that have to be dealt with, there is also the real problem of what to do about technology mismatch that often exists across different companies.
Whenever a large software company acquires a startup, the first order of business is often an attempt to move the startup's application onto the larger company's technology infrastructure so that it can get benefits of "economies of scale" or some other buzzword that is typically a euphemism for "we bought you so now you're our bitches" that is not grounded in business realities. This often requires application rewrites that have the unfortunate consequence of causing the shipped application to stagnate as all efforts are poured into recreating the same application using a different technology. In addition, the founders of the startup typically get frustrated with what they [rightfully] deem as a pointless exercise and eventually move on to greener pastures. There are a number of examples of this that have occurred in the "Web 2.0" space as shown below
From Fred Wilson's post We Need A New Path To Liquidity
So if you can't take a company public, how do you get out? M&A has been the primary answer in the web/tech sector for the past eight years. And it's been a great period to sell companies. We've sold three in the past couple years out of our Union Square Ventures portfolio, delicious, FeedBurner, and TACODA, to Yahoo!, Google, and AOL, respectively. Were we happy to take their money? Yes. Were we happy with the outcome? Yes. Were they good buys for their new owners? On the face of it, yes. But if you look deeper, I wonder. Delicious grew nicely for a while under Yahoo!'s ownership but recently the user base has fallen off pretty dramatically. I double checked this chart in compete and alexa and they all show the dropoff. Well, what about FeedBurner? Clearly Google has done a good job with that acquisition. Well I am not sure. I don't see any integration between Adwords and FeedBurner yet. I can't buy FeedBurner inventory through Google's text ad interface. I honestly don't see any additional money flowing to me, the publisher of the feed, since the Google acquisition. There's no way to know what the rate of signup by publishers has been since the acquisition, but I wonder if it's increased much. And TACODA? I know that TACODA had an incredible fourth quarter post the acquisition by AOL, blowing way past the numbers we were projecting in our annual budget. But in the first quarter, AOL fired Curt Viebranz, TACODA's CEO, and many of the top members of the TACODA team are now gone from AOL. Another acquisition messed up. But who am I to complain? We got paid right? So sit down and shut up.
So if you can't take a company public, how do you get out? M&A has been the primary answer in the web/tech sector for the past eight years. And it's been a great period to sell companies. We've sold three in the past couple years out of our Union Square Ventures portfolio, delicious, FeedBurner, and TACODA, to Yahoo!, Google, and AOL, respectively. Were we happy to take their money? Yes. Were we happy with the outcome? Yes. Were they good buys for their new owners? On the face of it, yes.
But if you look deeper, I wonder. Delicious grew nicely for a while under Yahoo!'s ownership but recently the user base has fallen off pretty dramatically. I double checked this chart in compete and alexa and they all show the dropoff.
Well, what about FeedBurner? Clearly Google has done a good job with that acquisition. Well I am not sure. I don't see any integration between Adwords and FeedBurner yet. I can't buy FeedBurner inventory through Google's text ad interface. I honestly don't see any additional money flowing to me, the publisher of the feed, since the Google acquisition. There's no way to know what the rate of signup by publishers has been since the acquisition, but I wonder if it's increased much.
And TACODA? I know that TACODA had an incredible fourth quarter post the acquisition by AOL, blowing way past the numbers we were projecting in our annual budget. But in the first quarter, AOL fired Curt Viebranz, TACODA's CEO, and many of the top members of the TACODA team are now gone from AOL. Another acquisition messed up.
But who am I to complain? We got paid right? So sit down and shut up.
From Joshua Schachter's comment on "How Yahoo dropped the del.icio.us ball with a pointless 3 year rewrite (from mod_perl to PHP)"
The writer is accidentally correct - we were told that it had to be in PHP to get ops support. Curiously the PHP part didn't take that much time - the majority of the "business logic" is in C++ which took forever and ever to write. I think the open question now is whether the remaining team will be able to innovate or be stuck in complicated codebase hell.
From Dennis Howlett's article Google Sites - spoiled by usability issues
After 16 months at Google developer’s hands, the outcome is substandard. This is such a pity. In its JotSpot incarnation, it was far from perfect but that didn’t matter because JotSpot was shedding light on a new way of collaborating. Since passing into Google’s hands, the guts have been ripped out and then re-assembled with as much Google ’stuff’ as they could cram in but rushed to completion. At the very least, Google should get rid of the gadgets addition facility and rework it. Otherwise, I sense the SMBs at which it is aimed will find the service a turn off. Google has a real chance to differentiate itself from Microsoft - which is clearly what it wants to do, while adding significant numbers of users to its Google Apps offering. It won’t do it this way because despite all the gripes around Microsoft products, the fact is Microsoft offers a more polished experience. Until Google truly understands this, it will find it difficult to adequately compete. In the meantime, offerings like Wetpaint and Ning have little to fear.
After 16 months at Google developer’s hands, the outcome is substandard. This is such a pity. In its JotSpot incarnation, it was far from perfect but that didn’t matter because JotSpot was shedding light on a new way of collaborating. Since passing into Google’s hands, the guts have been ripped out and then re-assembled with as much Google ’stuff’ as they could cram in but rushed to completion.
At the very least, Google should get rid of the gadgets addition facility and rework it. Otherwise, I sense the SMBs at which it is aimed will find the service a turn off.
Google has a real chance to differentiate itself from Microsoft - which is clearly what it wants to do, while adding significant numbers of users to its Google Apps offering. It won’t do it this way because despite all the gripes around Microsoft products, the fact is Microsoft offers a more polished experience. Until Google truly understands this, it will find it difficult to adequately compete. In the meantime, offerings like Wetpaint and Ning have little to fear.
From Ryan Paul's article Jaiku users flee to Twitter as a result of Google's neglect
Unfortunately, Google has allowed Jaiku to languish and is now suffering a backlash from frustrated users who are beginning to mass-migrate to Twitter, a competing microblogging service. Jaiku's external feed servers, which are used by third-party Jaiku client applications, have been down frequently during the past week, often returning 504 gateway errors or nothing at all. During the brief stints when the feed servers are operational, they have been extremely slow and often out of sync with the actual content—typically lagging by between four and 13 hours. These problems have been noted by many users and several third-party Jaiku client application developers who discussed the problem with Ars. Users also complain that Jaiku's IM bots and the third-party Jaiku Facebook interface are exhibiting problems as well. When Google announced the acquisition, the company promised new features within a few months, but we have seen no evidence of any development at all. Registration is still closed and new users can only join the site by receiving an invitation from Google. The Jaiku developers have been completely and totally silent since the announcement of the takeover, and the official Jaiku blog—which used to have several messages a month—has had no new posts at all. The Jaiku Team feed has also not received any posts from Jaiku developers since the acquisition.
Unfortunately, Google has allowed Jaiku to languish and is now suffering a backlash from frustrated users who are beginning to mass-migrate to Twitter, a competing microblogging service. Jaiku's external feed servers, which are used by third-party Jaiku client applications, have been down frequently during the past week, often returning 504 gateway errors or nothing at all. During the brief stints when the feed servers are operational, they have been extremely slow and often out of sync with the actual content—typically lagging by between four and 13 hours. These problems have been noted by many users and several third-party Jaiku client application developers who discussed the problem with Ars. Users also complain that Jaiku's IM bots and the third-party Jaiku Facebook interface are exhibiting problems as well.
When Google announced the acquisition, the company promised new features within a few months, but we have seen no evidence of any development at all. Registration is still closed and new users can only join the site by receiving an invitation from Google. The Jaiku developers have been completely and totally silent since the announcement of the takeover, and the official Jaiku blog—which used to have several messages a month—has had no new posts at all. The Jaiku Team feed has also not received any posts from Jaiku developers since the acquisition.
The stories are the same except that some of the names are different. A startup gets bought and immediately stops innovating because all their development time is being spent porting the code to a new platform. During that time newer, more agile competitors show up and eat their lunch. Why I find this to be such a conundrum is that when you buy a technology startup, you are primarily buying three things
However the standard operating procedure during Web software acquisitions is to discard the technology and consequentially tick off the employees who made the product a success in the first place thus creating an exodus. The application rewrite plus employee exodus leads to product stagnation which eventually leads to lots of pissed off customers. Thus the entire value from the acquisition is effectively thrown away.
This is the default situation when it comes to acquisitions in the software industry. For every successful acquisition like Google + YouTube there are two or three that are more like Google + Dodgeball. So if there is a startup whose product you love that you hear is being acquired by a one of the large Web companies, be happy for the founders and be sad for yourself because the product you love is likely going to become a neglected bride.
Disclaimer: I'm an employee of a large software company that has displayed similarly counterproductive tactics when acquiring startups. Although no examples are provided in the post above, I'm sure some can be found from it's history of acquisitions.
Now Playing: Dire Straits - Money For Nothing