Strong opinions, weakly held

Finding the value in acquired companies

Horace Dediu on acquiring companies:

Clayton Christensen succinctly defined the value in any company as the sum of three constituent parts: resources, processes or business models. Market value can be nothing more and nothing less than these three things.

An acquisition has to be positioned on one of these targets just like a product is positioned on a specific market. The problem with being deliberate about where the value lies is that once positioned a certain way, the integration team will begin to execute on that plan. This means that the thing you decided was worth most (e.g. resources) gets all the attention and the other potential sources of value (processes or profit models) are discarded.

This argument reduces to there being three separate companies being available. The buyer pays for all but gets to keep only one.

When you look at it this way you realize that the reason most acquisitions fail is because the buyer throws away most of the real value in the company.

He goes on to analyze the acquisition of Skype by Microsoft by these criteria. I’d like to see other acquisitions that occurred further back in the past analyzed in this way. My gut feeling is that nearly all acquisitions focus on resources, since they’re the most obvious repository of value and the easiest (relatively speaking) thing to integrate into the acquiring company. It’s very hard to merge the processes of two different companies together, or for an acquiring company to support new business models that didn’t develop organically.


  1. Link is a no-op.

  2. Back in the height of the 1990s internet bubble, the startup that I was working for was acquired. First, the reason for the acquisition was the technology and business strategy. Once the acquiring company realized that those weren’t worth as much as they’d initially thought, suddenly they were buying us for the knowledge of web-related technologies (people). I decided to leave after this switch in strategy and it caused a minor panic among the acquiring company (nice to find out I was on their list of critical people. As a QA engineer, I had automated assumed that I wasn’t).

    In fairness, at the time, companies were scared about the newness of the web and things were changing so much that the value of the technology and business strategy did change significantly in a short time.

  3. As someone who went through several acquisitions (both on the acquiring and acquired side of things), I can tell you that the most likely outcome is that the acquired company’s technology or product is slowly phased out or abandoned as the realization of how hard it is to merge products/teams/features/cultures becomes apparent. If the acquiring company was lucky, they have a bunch of bright people who can be retasked to other projects.

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