Comment by dalbasal | Hacker News Reader

Comment by dalbasal | Hacker News Reader

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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.

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)).

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.

> 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.

My own uneducated position is that is a new problem because shareholders don't want their money back. Shareholders have been piling money into stocks [1], so if you gave them the money back they would likely just put it right back into Microsoft (or, more likely, it would signal that Microsoft doesn't know what to do with the money, so people would pull out of Microsoft to invest somewhere else).

[1] https://finance.yahoo.com/news/more-money-poured-stocks-past...

If they reinvested the dividend right back in MSFT then MSFT can give its owners a tax break and get the same economic result by buying back shares.

"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.

> I agree, but I think MSFT (and friends) are in this predicament no matter what. What's the alternative?

Well, they can just stop growing, and continue doing what works. If that thing stops working (or they have a good belief that it will stop working before too long), they have two options: 1) do nothing, and gradually wind the company down and return capital to shareholders so they can reinvest it elsewhere, or 2) pivot, and accept that the things they are pivoting to will be a rounding error in their finances for years while they grow.

Obviously this is disastrous in our current economic system; a company that tried this would watch its stock price fall into the toilet before too long. But absent that, why not?

Consolidation is what will bring us to a corporate-run dystopia. I would much rather the world be filled mostly with small and medium sized businesses, with every market open to a lot of competition and even cooperation (on standards, not on prices). But I know, that's just a pipe dream, and humans generally suck at cooperation when money is involved.

>> a company that tried this would watch its stock price fall into the toilet.. But absent that, why not?

lol

>> Consolidation is what will bring us to a corporate-run dystopia. I would much rather the world be filled mostly with small and medium sized businesses...

The alternative to that is trust busting, perhaps. I was commenting on the market logic, so to speak. If we're optimistic, maybe it'll be a corporate-run utopia. Zuck's not great, but I think this generation is kinder than the Carnegie/Rockefeller days.

Look... if Bezos, Zuck, and such continue on trend, they'll soon be very rich. Bigger than the Rockefeller. Their companies will be one par with the VOC/EIC in terms of market cap, but I don't know if it's really comparable to that.

Google/FB are sketchy, if trust-busting comes into play. Advertising is sensitive to both regulation and trustbusting. A ban on snooping, manipulation and overly vigorous advertising would hurt advertising. Trust-busting, like separating adwords from google, hurts advertising monopolies too.

Meanwhile, what happens if a regulator messes up and breaks FB? Would the world lack for social messaging media? If Ford stops making cars, fewer cars are made in the world. If fewer FB likes happen, more sploosh sploshes happen and all is well in the world...

More likely though, no help is coming. That being the case, I think the tech bros aren't the worst candidates for trillionaire status. Someone had to be it. I'm glad it isn't the real estate bros.

Well; having been employed at 4 different companies in the past, where those companies were purchased and then shut down by a competitor - I'm pretty sure that consolidation is almost always a bad thing. For the workers, and the consumers.

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.

Tech M&A guy here.

This is survivorship bias at its finest.

How about Facebook's acquisition of Instagram? Google's acquisition of YouTube? Android? DoubleClick? Amazon's acquisition of Twitch? I could go on.

For the record, yes there are VERY many acquisitions that go wrong, especially when you get to the $B+ value. The parent's characterization seems in line with the "no one ever got fired for using IBM" and that sentiment is grossly unjustified for M&A. There are a bunch of other factors that go into corporate strategy. One example - buying a competitor to eliminate competition and thus protecting future dollars.

> Facebook's acquisition of Instagram? Google's acquisition of YouTube? Android? DoubleClick? Amazon's acquisition of Twitch? I could go on.

These examples are not comparable to what the OP was saying, e.g AOL/Time-Warner, Compaq/HP are mergers of giants with lot of employees.

Ok fine. Here ya go:

BoA/Merrill Lynch

Shell/Royal Dutch

Sanofi/Avantis

Glaxo/SmithKline

P&G/Gillette

Roche/Genetech

Exxon/Mobil

Conoco/Philips

Disney/Fox

AT&T has had so many successful mergers that the government has basically had to split them up every time because it made them into a monopoly.

Should I go on?

EDIT: PS - DoubelClick in 2007 was considered "BIG". It had 1200 employees and was bought for $3.1B. Which was A LOT at the time.

Those are good examples, you should have included them in the first post.

Skype’s eventual acquisition by Microsoft is an interesting one.

Can anyone contextualize the horse trading that led to that?

>September 2005, eBay acquired Skype for $2.6 billion.

In September 2009, Silver Lake, Andreessen Horowitz, and the Canada Pension Plan Investment Board announced the acquisition of 65% of Skype for $1.9 billion from eBay.

Microsoft bought Skype in May 2011 for $8.5 billion.

https://en.wikipedia.org/wiki/Skype

>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.

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.

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.

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

[2] https://news.ycombinator.com/item?id=171879

Good find. I was a lot more focused on PPC back then. After Apple switched to Intel, I didn’t really see the reason for PA Semi’s acquisition.

The iPhone’s magic was all about the software to me.

I'm amused to see 'wmf commenting today about M1 ;)

Who is wmf?

https://news.ycombinator.com/user?id=wmf

I think it's impossible to accurately determine the ROI of an acquisition with incomplete data. There's way too many factors at play.

I thought about NeXT, but that was a bit of a weird one, because NeXT executives and technology replaced a lot of Apple’s executives and technology. That ended up being a stealth takeover by NeXT.

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.

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.

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.

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.

I think that’s what GP meant by poor imitation of BH.

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.

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.

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...

[2] https://www.wired.com/2009/10/youtube-bandwidth/

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.

> 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.

google maps and youtube and instagram were acquisitions

2/3 of those arguably are among the most important parts of their respective companies

Just curious the difference of Waymo and Boston Dynamics.

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