Events | Previous Events
October 14, 1998 Event
Consolidation: A Driving Force of the Silicon Valley Ecosystem As we approach the last quarter of 1998, world markets are on pace to register a record year for mergers and acquisitions. In the United States alone, roughly 5,300 deals worth over $973 billion were cut in the first half of the year, making for the strongest opening six-months of M&A activity ever. The ratio of sellouts to IPOs is over 8 to 1 today, up from 4 to 1 in 1996. The technology sector in particular is experiencing consolidation across the board - from chip makers and telecom companies such as National Semiconductor and MCI, to ISPs and interactive ad agencies such as Netcom and US Web. Undoubtedly, consolidation is a driving force of the Silicon Valley ecosystem. Macroeconomic trends in the economy and microeconomic trends in the industry have laid the foundation for the consolidation explosion. A thriving economy and bull market has fattened the valuations of technology stalwarts, providing cheap currency for the acquisition of smaller companies. Meanwhile, intense competition and industry maturation has resulted in fewer but bigger players in the technology sector. Potential acquirees add fuel to the fire by building "feature only" companies whose sole goal is to be absorbed by a wealthy suitor. And investors and venture capitalists, comfortable with the likelihood of acquisition rather than IPO, place their support (and dollars) behind companies without so much as a stand-alone business model. Why does consolidation occur? The pressure to reduce time to market leads many companies to acquire in order to fill product holes or enhance existing offerings. Labor shortages and innovation gaps force the issue. And powers like Microsoft and Cisco often find it easier to buy versus build. Yet consolidation may not always deliver promised benefits. In many mergers and acquisitions, integrating products and people results in post-consolidation indigestion. Product integration can run into platform and scalability snags. People integration requires newly married companies to redistribute responsibilities while keeping morale high. In spite of these hurdles, consolidation activity is likely to continue, especially as competition heightens. Perhaps the most successful companies will learn to use consolidation both as a tactic and as a strategy.
The Big Get Bigger
Glory Seekers Key Learnings CONSOLIDATION REASONS Oddly, consolidations can create new niche areas. As an acquired company becomes part of a larger, typically more bureaucratic whole, it may lose some of its nimbleness, opening up the opportunity for others. Through acquisition, a company can gain immediate access to partners and customers of the acquired firm. In this manner, companies can both compress their time to market and bypass having to build such relationships from scratch. CONSOLIDATION RISKS Post-acquisition, an acquiree's brand can either be assimilated or left independent. In some cases, loss of brand identity and independence may lead to churn among even the most loyal (but brand sensitive) customers. Without stand-alone business models, the worth and purchase price of "feature only" companies are tied to new and changing proxy valuations. Investors in such firms must be cautious as they take on the additional risks associated with evolving markets. CONSOLIDATION FEVER Equity investments are resulting in a new flavor of consolidation. However, this phenomenon may reduce customer choice and stifle competition because of the control investing companies exert over beholden firms. The Internet empowers acquirers to quickly and easily identify existing consolidation opportunities. And while the overall process of due diligence largely remains unchanged, firms arrive at this stage cheaper, faster, and more efficiently. QUOTE OF THE NIGHT
Consolidation often is a natural effect of maturation of an industry over time, particularly at the end of boom phases. A key driver of this effect is surplus liquidity, which in the technology industry's case is the currency of stock options.
Poor compatibility of cultures within newly combined organizations may complicate product integration, resulting in delays and missed opportunities. In addition, acquired firms may suffer if their strategies are completely reset to match those of their acquiring parents.
Even in the current market downturn, there is still too much money in search of ideas. The additional factors of decreased time to market, first mover advantage, and general Internet frenzy, makes this environment even more ripe for consolidation.
"With over twelve billion dollars in the bank, Microsoft uses acquisitions to make Silicon Valley its own personal R&D farm."