Recently I saw an interesting news article, on TechCrunch.com, about a telecom company purchasing a drone company. The title of the story is “Verizon buys Skyward, a drone operations company.”
Here is an excerpt:
Forget about Yahoo for a minute. Verizon just announced it has acquired Skyward, a drone operations and management company based out of Portland, Oregon for an undisclosed amount. Verizon says Skyward will help developers and businesses better create and manage drones that also happen to utilize Verizon’s mobile network services and infrastructure.
Why would a telecom company purchase a drone company? The fact is, Skyward could bring their drone operation management system to Verizon’s Internet of Thing portfolio. They could leverage their investment in mobile network infrastructure and by adding associated services. This purchase strengthens Verizon’s investments that will help them establish a position in the emerging Internet of Things area.
In 2016 $612.9 billion was spent in mergers and acquisitions within the global tech sector. The phenomenon of large companies acquiring small companies or startups is fierce. Verizon wants to acquire the drone company to expand their business. Google is one most the prolific acquirers in the technology field. Facebook uses its stock as an acquisition currency. Those big technology companies love to purchase startups. Deloitte’s 2016 Tech Report of M&A trends indicates that 41% of the executives surveyed believed in expanding/diversifying products or services, and technology acquisitions is the most critical driver of M&A. Unlike IPOs, last year was active for tech startup M&A, and more and more tech-startup M&A activities are happening as M&A is one way forthe large established companies to access these new resources.
Why do big companies prefer to purchase startups rather than launch a new project?
I think there are several reasons:
- It’s time-consuming to launch a new project. Every project has a different mission. Sometimes company leaders just want to make a monetary investment rather than invest a huge amount of time and talent. Big companies are always facing fierce competition, and they will let the opportunities slip away if they don’t make decisions quickly.
- High uncertainty. Triumphs require a certain amount of luck, and that’s not always predictable or reproducible. Not every successful entrepreneur can ensure they could create a successful business again. Therefore, M&A is one way to manage the risk.
- They are targeting talent and resources. Startups have unique assets such as their team, market connections, and patents.
- Strategy considerations. Every company has competitors, no matter how big they are. Some competitors are obvious, direct and immediately threatening. Others are less clear, but they’re potential threats. Startups are potential threats, and they could engulf a big company’s market in the future or face acquisition by other competitors. Those problems can be solved by purchasing the threat when it is small.
External aquisitions solve problems better than internal projects, but there is a negative side of solely relying on acquisitions for new platforms of growth. The cultures of the two companies could easily clash. There will be increased administrative burden if they have different divisional structures. It’s always easier to working with internal projects because you’re already familiar with the organization and can put more resources on innovation. All divisions are integrated as a part of the organization and more efficient at focusing on innovation.
Every approach has its pros and cons. The strategy of innovation by acquisition could be a great catalyst, it could broaden your talent pool, be beneficial to R&D capabilities, but also could go wrong when not executed properly. For M&A, integrating the new group into the existing environment and focusing on innovation is the key. For internal innovation, one of the barriers is how to break through the organizational inertia and implement the new strategy. Companies should choose the right approach depending on the situation.