8 ms·

I think a lot of big acquisitions make "sense," given the current market. The most successful companies have lots of cash, high share prices, and amazing cash

I think a lot of big acquisitions make "sense," given the current market. The most successful companies have lots of cash, high share prices, and amazing cash cows. They could borrow for (almost) free, so resources are practically unlimited. Their R&D is already well funded. Most of their big, growth oriented endeavours are not cash-constrained. There are usually no factories to build or production to scale up. Google tried "20% time." They tried "let many flowers grow." Those things seemed ambitious at 2007-scale. In 2021 terms... new flowers need to be S&P 500 companies to represent growth, instead of just clutter. "Meaningful growth," for Alphabet, is a big number. How else does a MSFT, Google or (especially) FB put $20bn to work? Acquiring "just works." Of course, there are in-house alternatives. Waymo is an in-house investment by Alphabet that's bigger than this Nuance acquisition... especially if you consider the $bns Waymo will continue to need until some unknown future date. Self driving is looking more hopeful (certainly to investors) than it was when waymo started.... but waymo is still a dubious investment. Consider that Google could have bought any car company, for about as much as waymo will cost eventually. Car companies have loans, so you could quibble the math... but details. Acquiring is easy. The path of least resistance wins >50% of the time. We have that dynamic here, both in the human/managers sense and in the arbitrage-like incentives in the market currently.

bombcar 6y ago
Acquiring is a simple way to show the Board/Shareholders that you're "doing something" - but I suspect it's rarely very successful in the long run. Unless you acquire a business that ACTUALLY provides some synergies you're just on the path of transitioning from a successful company to a poor imitation of Berkshire Hathaway. It does have the advantage that you can "spin off" your acquisitions once they fail to do anything interesting (though this is more commonly seen in sunset industries/dying companies (see AOL, Compaq, etc)).
- CerealFounder 6y ago
  Its rarely the syngeries that make it work, instead its often they bought a business they leave alone that has much more room to grow.
  - dalbasal 6y ago
    IDK if it's rare that synergies work, so much that it's common for synergies to fail. Consider Google. They acquired Youtube, Android... Google's skillset was perfect for taking these proving concepts and making them 1080px, so to speak. Now, Youtube and android feed users & data to the adwords cash machine. Youtube and android defend the adwords castle, denying competitors. Fantastic synergy. OTOH, no company will ever find a synergy with ebay. They have spiky bits where companies are supposed to have copulation bits.
    - _delirium 6y ago
      Google acquiring YouTube also had good synergy because it caused bandwidth costs to plummet, which YouTube was having a hard time managing as a startup. The company was bleeding money on bandwidth, because they were an end user who had to pay an upstream ISP for transport [1]. Once Google acquired them, suddenly they're on effectively a backbone network and have settlement-free peering with all kinds of other networks. That drove bandwidth costs down to near zero according to one analysis [2]. [1] https://arstechnica.com/gadgets/2015/04/cheaper-bandwidth-or-bust-how-google-saved-youtube/ https://arstechnica.com/gadgets/2015/04/cheaper-bandwidth-or... [2] https://www.wired.com/2009/10/youtube-bandwidth/ https://www.wired.com/2009/10/youtube-bandwidth/
      - dalbasal 6y ago
        Yep. Also, "just give it as much resources as it needs, we're rich" was a game google had already proved willing to win with gmail. It's easy to lay the tactic out in retrospect. Fund "resource hogs" that users don't pay for. Bet on long term bandwidth costs going down. Bet on major consumer monopolies being valuable, long term. Sounds great and it was great. OTOH, lets pour $mns into a "business" that we bought for $bns, that has no revenue... because in 15 years we will be worth $trns and it will all sound like peanuts... this was once considered imprudent business planning. Google were willing to do it. Others weren't. Only a few even could.
- tachyonbeam 6y ago
  Can't you just acquire a successful business and then do nothing? Just let the business you acquired keep being successful? It's not that different from investing in the stock market, except that you can have more control over the business you acquired if you need to down the line. You also then own their IP, which might be the most important part.
  - benreesman 6y ago
    I think that’s what GP meant by poor imitation of BH.
  - sib 6y ago
    Here's the challenge: Let's say there is a business that is successful and generating $10B in revenue and $1B in profit and valued at $15B market cap. Now you want to buy it. Historically, you will have to pay something like a 40% premium to its market value in order to acquire it. So you will pay $21B ($15B * 1.4) to own this company. If you "just do nothing," then the company will presumably still generate $10B in revenue and $1B in profit (and really still be "worth" $15B). So, you paid $21B for something worth $15B, making the shareholders of the selling company very happy and the shareholders of your company sad. As a CEO, this is a good way to lose your job. Effectively, you are forced to present (and attempt to execute) a plan for how the combined business either generates more revenue or has lower costs than the two companies did separately in order to get your board's approval on behalf of your shareholders.
- dalbasal 6y ago
  I was actually thinking "Satya, you know that Berkshire is you end game here... right?" I agree, but I think MSFT (and friends) are in this predicament no matter what. What's the alternative? That said, I don't really think BRK is the end game. For one thing, Berkshire is kind of an exception. There are plenty of smaller conglomerates that are actually like Berkshire, but most pretend not to be conglomerates. They pretend to be far more cohesive & synergetic than Berkshire. Also, Alphabet shows that synergies can be easy to find. Youtube, Android... This generation's acquisitions need to be 10X bigger than that. But... these companies are in uncharted waters. No company has wielded free resources at the scale that MSFT now operates. They aren't the only one currently, but they don't have predecessors... unless we go back to VOC or somesuch. OTOH... Satya is accidentally in the same position Buffet intentionally sought: Sitting on a pile of capital that must be allocated.
  - pedrocr 6y ago
    > I agree, but I think MSFT (and friends) are in this predicament no matter what. What's the alternative? Returning money to shareholders is the common solution for when you don't know how to grow more and profitability in the businesses you're already in and don't have any particular advantage in entering new ones. I'm not saying that's what they should be doing but sitting on a pile of capital that you don't know what to do with isn't a new problem that we need to invent new solutions for.
    - dalbasal 6y ago
      "Returning money to shareholders" is largely a consequence macroeconomic policy or state of affairs. It is, evidently, not actually a choice that CEOs currently have in practice. Dividends and/or buybacks are one of the powers shareholders do tend to wield, in practice. They want to invest more, not less. Also, IDK if it is a common solution. Nothing is really common at MSFT-scale. A free cash flow like Google, Alphabet, etc. is almost unprecedented. Meanwhile, I do actually think that this is better for shareholders. IMO "Synergies" is a term somewhere between euphemism and a boomerism but for the purpose of "shareholder value" it doesn't matter. At Monopoly/Unicorn/FAANG scale, there are big opportunities for synergy. Think Google-Android. Why is Nuance being owned by Alphabet less efficient than being traded independently or owned by private investors? Why is Alphabet owning vanguard more efficient than owning Nuance? The answer to those question can have no actual impact on reality. If the acquired business is cash generative, they can left to their devices. If the parent company doesn't borrow, then "efficiency" never becomes explicit. Explicit efficiency is relative to cost of borrowing. Implicit efficiency is implied by share prices... and at this point things get foggy.
- john_moscow 6y ago
  Based on my personal experience, since 2008 more and more companies are about showing somebody that you are "doing something" with their money. It could be the VCs, it could be the EU grants, it could be the stockholders, but that's the business model you get with the abundance of capital and low interest rates.
- wayoutthere 6y ago
  I think this was once true, but is significantly less so in the context of cloud platforms. It’s very easy from a business model standpoint for Microsoft to integrate Nuance NLP modules with Azure and start selling access to them at list prices very quickly. You don’t need to hunt new customers with a marketing plan; you likely already have customers with these needs in your pipeline so it’s a matter of making sure your AEs know what’s happening. Everything is simpler at scale in a cloud business model, which is why these 3 companies in particular are eating the world.
- perardi 6y ago
  Apple has had some decent ones. P.A. Semi, notably. And for $278 million dollars, the ROI on that was ludicrous. But overall, yes. I can think of so many large-scale acquisitions that didn't go so swimmingly. - AOL/Time-Warner - Ford/its stable of luxury brands like Jaguar and Land Rover - Compaq/HP - Daimler/Chrysler It seems like these “big” mergers tend to now show the synergies people promise. Maybe it’s just too much culture to integrate.
  - tambourine_man 6y ago
    >Apple has had some decent ones. P.A. Semi, notably And, let's not forget, NeXT. Probably one of the best U$400 something million ever spent.
    - microtherion 6y ago
      It's funny how there seems to be so little correlation between acquisition prices and eventual value. The PA Semi acquisition was an enormous success at what was at the time a tiny price. NeXT was an enormous success, though $400M at the time was a bet-the-farm price for Apple. In contrast, while I'm sure Beats has easily paid for itself, $3B was not exactly cheap, and the results were not 10x PA Semi.
      - mbesto 6y ago
        I think it's impossible to accurately determine the ROI of an acquisition with incomplete data. There's way too many factors at play.
      - tambourine_man 6y ago
        I remember people being flabbergasted by the price they paid for PA Semi. Dividing the price by the number of engineers seemed indeed ludicrous. And yet, here we are.
        microtherion 6y ago
        At the time, there were only 3 comments on HN I could find. One of them was certainly questioning the decision: [1] But wmf was right on the money [2]: "Maybe Apple thinks they can outdo the Cortex". [1] https://news.ycombinator.com/item?id=171511 https://news.ycombinator.com/item?id=171511 [2] https://news.ycombinator.com/item?id=171879 https://news.ycombinator.com/item?id=171879
- ffggvv 6y ago
  google maps and youtube and instagram were acquisitions 2/3 of those arguably are among the most important parts of their respective companies
- mbesto 6y ago
  > you're just on the path of transitioning from a successful company to a poor imitation of Berkshire Hathaway. You mean Berkshire Hathaway, that's current market cap is ~$615B and hails arguably one of the most successful investors of all time as its CEO? That Berkshire? I don't know about you, but I'd happily be just 1/100th as successful as how that model turned out.
fomine3 6y ago
Just curious the difference of Waymo and Boston Dynamics.

bombcar 6y ago

Acquiring is a simple way to show the Board/Shareholders that you're "doing something" - but I suspect it's rarely very successful in the long run. Unless you acquire a business that ACTUALLY provides some synergies you're just on the path of transitioning from a successful company to a poor imitation of Berkshire Hathaway. It does have the advantage that you can "spin off" your acquisitions once they fail to do anything interesting (though this is more commonly seen in sunset industries/dying companies (see AOL, Compaq, etc)).

CerealFounder 6y ago
Its rarely the syngeries that make it work, instead its often they bought a business they leave alone that has much more room to grow.
- dalbasal 6y ago
  IDK if it's rare that synergies work, so much that it's common for synergies to fail. Consider Google. They acquired Youtube, Android... Google's skillset was perfect for taking these proving concepts and making them 1080px, so to speak. Now, Youtube and android feed users & data to the adwords cash machine. Youtube and android defend the adwords castle, denying competitors. Fantastic synergy. OTOH, no company will ever find a synergy with ebay. They have spiky bits where companies are supposed to have copulation bits.
  - _delirium 6y ago
    Google acquiring YouTube also had good synergy because it caused bandwidth costs to plummet, which YouTube was having a hard time managing as a startup. The company was bleeding money on bandwidth, because they were an end user who had to pay an upstream ISP for transport [1]. Once Google acquired them, suddenly they're on effectively a backbone network and have settlement-free peering with all kinds of other networks. That drove bandwidth costs down to near zero according to one analysis [2]. [1] https://arstechnica.com/gadgets/2015/04/cheaper-bandwidth-or-bust-how-google-saved-youtube/ https://arstechnica.com/gadgets/2015/04/cheaper-bandwidth-or... [2] https://www.wired.com/2009/10/youtube-bandwidth/ https://www.wired.com/2009/10/youtube-bandwidth/
    - dalbasal 6y ago
      Yep. Also, "just give it as much resources as it needs, we're rich" was a game google had already proved willing to win with gmail. It's easy to lay the tactic out in retrospect. Fund "resource hogs" that users don't pay for. Bet on long term bandwidth costs going down. Bet on major consumer monopolies being valuable, long term. Sounds great and it was great. OTOH, lets pour $mns into a "business" that we bought for $bns, that has no revenue... because in 15 years we will be worth $trns and it will all sound like peanuts... this was once considered imprudent business planning. Google were willing to do it. Others weren't. Only a few even could.
tachyonbeam 6y ago
Can't you just acquire a successful business and then do nothing? Just let the business you acquired keep being successful? It's not that different from investing in the stock market, except that you can have more control over the business you acquired if you need to down the line. You also then own their IP, which might be the most important part.
- benreesman 6y ago
  I think that’s what GP meant by poor imitation of BH.
- sib 6y ago
  Here's the challenge: Let's say there is a business that is successful and generating $10B in revenue and $1B in profit and valued at $15B market cap. Now you want to buy it. Historically, you will have to pay something like a 40% premium to its market value in order to acquire it. So you will pay $21B ($15B * 1.4) to own this company. If you "just do nothing," then the company will presumably still generate $10B in revenue and $1B in profit (and really still be "worth" $15B). So, you paid $21B for something worth $15B, making the shareholders of the selling company very happy and the shareholders of your company sad. As a CEO, this is a good way to lose your job. Effectively, you are forced to present (and attempt to execute) a plan for how the combined business either generates more revenue or has lower costs than the two companies did separately in order to get your board's approval on behalf of your shareholders.
dalbasal 6y ago
I was actually thinking "Satya, you know that Berkshire is you end game here... right?" I agree, but I think MSFT (and friends) are in this predicament no matter what. What's the alternative? That said, I don't really think BRK is the end game. For one thing, Berkshire is kind of an exception. There are plenty of smaller conglomerates that are actually like Berkshire, but most pretend not to be conglomerates. They pretend to be far more cohesive & synergetic than Berkshire. Also, Alphabet shows that synergies can be easy to find. Youtube, Android... This generation's acquisitions need to be 10X bigger than that. But... these companies are in uncharted waters. No company has wielded free resources at the scale that MSFT now operates. They aren't the only one currently, but they don't have predecessors... unless we go back to VOC or somesuch. OTOH... Satya is accidentally in the same position Buffet intentionally sought: Sitting on a pile of capital that must be allocated.
- pedrocr 6y ago
  > I agree, but I think MSFT (and friends) are in this predicament no matter what. What's the alternative? Returning money to shareholders is the common solution for when you don't know how to grow more and profitability in the businesses you're already in and don't have any particular advantage in entering new ones. I'm not saying that's what they should be doing but sitting on a pile of capital that you don't know what to do with isn't a new problem that we need to invent new solutions for.
  - dalbasal 6y ago
    "Returning money to shareholders" is largely a consequence macroeconomic policy or state of affairs. It is, evidently, not actually a choice that CEOs currently have in practice. Dividends and/or buybacks are one of the powers shareholders do tend to wield, in practice. They want to invest more, not less. Also, IDK if it is a common solution. Nothing is really common at MSFT-scale. A free cash flow like Google, Alphabet, etc. is almost unprecedented. Meanwhile, I do actually think that this is better for shareholders. IMO "Synergies" is a term somewhere between euphemism and a boomerism but for the purpose of "shareholder value" it doesn't matter. At Monopoly/Unicorn/FAANG scale, there are big opportunities for synergy. Think Google-Android. Why is Nuance being owned by Alphabet less efficient than being traded independently or owned by private investors? Why is Alphabet owning vanguard more efficient than owning Nuance? The answer to those question can have no actual impact on reality. If the acquired business is cash generative, they can left to their devices. If the parent company doesn't borrow, then "efficiency" never becomes explicit. Explicit efficiency is relative to cost of borrowing. Implicit efficiency is implied by share prices... and at this point things get foggy.
john_moscow 6y ago
Based on my personal experience, since 2008 more and more companies are about showing somebody that you are "doing something" with their money. It could be the VCs, it could be the EU grants, it could be the stockholders, but that's the business model you get with the abundance of capital and low interest rates.
wayoutthere 6y ago
I think this was once true, but is significantly less so in the context of cloud platforms. It’s very easy from a business model standpoint for Microsoft to integrate Nuance NLP modules with Azure and start selling access to them at list prices very quickly. You don’t need to hunt new customers with a marketing plan; you likely already have customers with these needs in your pipeline so it’s a matter of making sure your AEs know what’s happening. Everything is simpler at scale in a cloud business model, which is why these 3 companies in particular are eating the world.
perardi 6y ago
Apple has had some decent ones. P.A. Semi, notably. And for $278 million dollars, the ROI on that was ludicrous. But overall, yes. I can think of so many large-scale acquisitions that didn't go so swimmingly. - AOL/Time-Warner - Ford/its stable of luxury brands like Jaguar and Land Rover - Compaq/HP - Daimler/Chrysler It seems like these “big” mergers tend to now show the synergies people promise. Maybe it’s just too much culture to integrate.
- tambourine_man 6y ago
  >Apple has had some decent ones. P.A. Semi, notably And, let's not forget, NeXT. Probably one of the best U$400 something million ever spent.
  - microtherion 6y ago
    It's funny how there seems to be so little correlation between acquisition prices and eventual value. The PA Semi acquisition was an enormous success at what was at the time a tiny price. NeXT was an enormous success, though $400M at the time was a bet-the-farm price for Apple. In contrast, while I'm sure Beats has easily paid for itself, $3B was not exactly cheap, and the results were not 10x PA Semi.
    - mbesto 6y ago
      I think it's impossible to accurately determine the ROI of an acquisition with incomplete data. There's way too many factors at play.
    - tambourine_man 6y ago
      I remember people being flabbergasted by the price they paid for PA Semi. Dividing the price by the number of engineers seemed indeed ludicrous. And yet, here we are.
      - microtherion 6y ago
        At the time, there were only 3 comments on HN I could find. One of them was certainly questioning the decision: [1] But wmf was right on the money [2]: "Maybe Apple thinks they can outdo the Cortex". [1] https://news.ycombinator.com/item?id=171511 https://news.ycombinator.com/item?id=171511 [2] https://news.ycombinator.com/item?id=171879 https://news.ycombinator.com/item?id=171879
ffggvv 6y ago
google maps and youtube and instagram were acquisitions 2/3 of those arguably are among the most important parts of their respective companies
mbesto 6y ago
> you're just on the path of transitioning from a successful company to a poor imitation of Berkshire Hathaway. You mean Berkshire Hathaway, that's current market cap is ~$615B and hails arguably one of the most successful investors of all time as its CEO? That Berkshire? I don't know about you, but I'd happily be just 1/100th as successful as how that model turned out.

fomine3 6y ago

Just curious the difference of Waymo and Boston Dynamics.