Semi-Organic Growth

Tactics and Strategies Behind Google's Success

George T. Geis

• Publisher: Wiley
• Year: 2015
• Print ISBN: 9781118933220
• eBook ISBN: 9781118933237
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Fusionen & Übernahmen

An in-depth examination of Google's innovative approach to M&A

Semi-Organic Growth presents a unique analysis of Google's distinctive expertise in the area of mergers and acquisitions, derived from more than 150 acquisitions carried out over the company's short history. While organizational growth has traditionally been characterized as organic (internally generated) or inorganic (from acquisition), this book examines Google's semi-organic strategy for accelerating product and service revenue, explained through a unique sector/subsector classification scheme that dynamically maps the media, Internet, and technology platform markets. You'll gain insight into Google's disclosure strategies for private company transactions, and more importantly, their methods for integrating acquisitions into product and service offerings to achieve ecosystem synergy. Unique perspective reveals the lessons learned along the way from both successes and failures, and the companion website gives you access to the tools that help you implement what you've learned.

Google's extensive use of M&A as a growth strategy has been in sharp contrast to the practices of rivals like Apple, and further contrasts with the failures of many other companies in corporate business development. This book shows you the thinking behind the company's successful methods, and demonstrates the mechanisms behind the success.

• Learn why corporate M&A activity often fails to add value
• Delve deep into the complex dimensions of M&A integration
• Discover what Google has learned through specific deals
• Consider innovative integration methods that foster synergy

Google is an iconic, premiere company, and it didn't happen by accident. Their success is driven by their innovative approach to strategy in all areas, and their M&A expertise has been a major contributing factor. Semi-Organic Growth takes you through the core workings of Google M&A to provide insight into successful strategy for the modern market.

Chapter 1
M&A Success and Failure

Konrad Lorenz's classic experiment with graylag geese captures the attention of many college freshman enrolled in an introductory psychology class. Lorenz found that geese would imprint on the first movable object within a critical period occurring 13 to 16 hours after hatching. It didn't matter whether the “parent” object was Lorenz's boots or a box placed on a toy train moving around a circular track.

Imprinting involves phase-sensitive learning whereby an animal or person establishes a pattern of attachment to another animate or inanimate object. Business ventures can also experience imprinting events during the early stages of development.

The notion that a corporation's early experiences can have lasting impact on future development has long been noted.¹ A firm commonly experiences an inertial impulse very early in its history that persists for a significant duration.² This initial organizational experience can involve corporate development activity. For example, Milanov and Fernhaber presented evidence that the initial alliance experiences of a venture affect future alliance formation patterns.³

Similarly, the acquisition of Applied Semantics early in Google's history (before going public in 2004) imprinted upon the company not only a proclivity to do mergers and acquisitions (M&A), but also to favor a certain style of M&A activity. Indeed, over its relatively brief corporate history, Google has acquired some 200 companies. In addition, Google has enjoyed an unusual degree of achievement in its dominant style of M&A activity, in 2012 asserting success in two-thirds of purchases,⁴ significantly higher than commonly cited acquisition statistics.

However, before we examine strategies and tactics that Google has employed in its transactions, let's examine how M&A performance has traditionally been measured, as well as some of the most common reasons for M&A failure and success.

M&A Activities

Developing a successful M&A program is a major challenge for any organization, arguably significantly more difficult than operational functions. Nevertheless, the pace and volume at which technology firms have been buying is staggering. For example, according to Thomson Reuters, the total spent on technology M&A worldwide during the first quarter of 2014 was $65.2 billion. This represented the largest dollar volume for any equivalent period since 2000.

Consider the breadth of activities that must be considered in doing a deal (Table 1.1).

Table 1.1 Deal Activities

Strategy	Economics	Organization	Deal Dynamics
Responding to opportunity or threat	Doing valuation/NPV analysis	Establishing best practices for integration	Designing the deal, including tax strategy
Determining attractiveness of industry position	Determining synergies	Building acquisition teams	Engaging in negotiation and bidding
Establishing strategic deal system	Estimating revenues, costs and cash flows	Merging corporate cultures, as necessary	Handling legal concerns
Determining optimal type of transaction	Determining effects of deal financing		Engaging in negotiation and bidding

Strategy

First of all, a compelling strategic rationale for a transaction must be developed. This may involve responding to an opportunity or shock in a market. Or it may be based on a creative vision whereby the company desires to establish new positioning in a market or even attempts to create a new market. For example, Google's cluster of eight robotics acquisitions in 2013 clearly signaled that the company saw significant market opportunity in areas that could range from robotic manufacturing to android-assisted home health care. Although to be successful such strategic thinking necessarily must involve senior executives, a company such as Google also has strategy leads engaging in analysis to support the growth of each major business division, including areas such as search, social, mobile, and YouTube.

Strategy also involves establishing a systematic approach to M&A activity. Organizations have established systems for virtually every activity of the firm—from HR management to supply chain management—but typically lag in thinking systematically about M&A and other corporate business development activities. There are some notable exceptions, such as GE Power Systems (later renamed GE Energy), as documented by Robert Bruner.⁵ We'll later examine Google's systematic approach to M&A.

In addition, deal strategy involves determining the optimal type of transaction. This includes knowing when not to acquire a company, but instead designing an alternative form of partnership relationship. For example, in 2003, as Apple was in the process of launching its iTunes platform, the Los Angeles Times reported that Apple was considering the purchase of Universal Music (a global player in recorded music) owned at the time by Vivendi.⁶ Apple correctly decided against the purchase. Doing so, among other things, would have created supply-channel conflict with other music providers that it needed to launch iTunes into a platform with a broad music library. Instead, Apple licensed music from Universal (and other music companies) in order to build an extensive collection for users to download using iTunes. (In 2014, Apple was facing different challenges as it attempted to maintain a leadership position in digital music and, as we'll see in Chapter 3, decided to engage in a major M&A activity to do so.)

Deal Economics

Second, deal economics must be evaluated. This involves conducting a valuation analysis that is appropriate for a given M&A transaction. This may require obtaining a constellation of values using methodologies such as discounted cash flow analysis, revenue, or earnings-related multiples using public company comparables, multiples from past M&A transactions, or multiples of something-or-other in early-stage ventures, There is rarely one North Star valuation metric. The constellation approach is intended to provide an acquirer with perspective regarding an appropriate range of value.

Jaw-dropping valuations have not been uncommon for deals in technology markets, including some Google transactions. Although not as staggering as the estimated $350 million/employee multiple that Facebook paid in its $19 billion acquisition of WhatsApp in 2014, Google has spent $1 billion or more for newly minted companies such as YouTube, Waze, and Nest.

Such valuations subject a company to critics who characterize the purchase as an irrational spending spree, but a deal might be later dubbed as brilliant if the target's platform proves out as a core asset in the acquirer's growth.

Synergy analysis is an essential ingredient in valuation, although synergy is perhaps one the most misused terms in corporate strategy. The word synergy has a most interesting origin as part of business jargon, according to the following account.

Professor J. Fred Weston was a giant in the field of M&A.⁷ He arrived at UCLA from the University of Chicago in 1949 and over his career wrote 32 books and 147 journal articles, many of which dealt with M&A. He mentored many outstanding graduate students, including Nobel Laureate Bill Sharpe. I worked with Fred, taking over as faculty director for UCLA Anderson's Executive Program on Mergers & Acquisitions from him in 2005. Fred continued to speak in the program. When I introduced him as the “John Wooden of M&A” (referring to UCLA's legendary basketball coach), it was scarcely an overstatement.

Fred told the story about how the term synergy came to be used in corporate deal making. The year was 1950, and Fred was at lunch in Westwood, California, with exec...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• Dedication
• Preface
• Acknowledgments
• Chapter 1: M&A Success and Failure
• Chapter 2: Imprinting Semi-Organic Growth
• Chapter 3: Google versus Apple: M&A Paths Diverge, then Converge
• Chapter 4: M&A Market Modeling
• Chapter 5: Google Media Deals
• Chapter 6: Google Internet Deals
• Chapter 7: Google Technology Platform Deals
• Chapter 8: Failed or Shuttered Deals
• Chapter 9: Disclosure versus Secrecy
• Chapter 10: Forms of Consideration
• Chapter 11: Contingent Consideration
• Chapter 12: Dimensions of M&A Integration and Semi-Organic Growth
• Chapter 13: Acqui-Hires Enhancing Google Offerings
• Chapter 14: Competitive Deal Constellations and Ecosystem Synergy
• References
• About the Website
• About the Author
• Index
• End User License Agreement