Category: Acquisitions

Buy a machine or buy the parts (creating vs. acquiring)

Last week I read a great post by Bryce Roberts of OATV called A Perfect Storm for Acqihires.

In it, he details the current state of the union for big companies and small ones looking to build out portions of their expertise through acquiring entire companies, and adding/folding them into the larger entity and  concludes:

It’s not necessarily a new frontier we’re entering. The current environment is simply turning up the volume on what has been happening for some time. And it’s only going to get louder. So BigCos and scaling startups, with increasingly valuable equity, are enjoying a perfect storm for acqhires.

I commented on the post, and as Bryce invited me to write up my thoughts, I figured I would do so here.  This is paraphrased from that comment and explored further below.

I can buy the parts to build a car, or I can pay more and buy one that I know will perform.  This is a no brainer decision because of time, quality, safety, and ongoing maintenance.

In the world of web startups,  you can hire individuals and try to make the team hum, or you can buy an agile group that you know can perform.  The issue is the premium you will pay for a fully functioning web startup team, but it may be worth acquiring a fully operational team that you know is going to produce what you want.

I am sure someone could do a better calculation but this is just back of the napkin stuff;

Acquhire option

what are 8 people worth all at once  who can produce? lets call it $10MM

2 engineers
2 mobile client developers
2 designers
2 front end developers
2 BD folks (hey im biased and can’t leave us out :))

Assuming $100K each thats $1MM in headcount instantly.

Cost? $10MM upfront to buy the startup and product.  Great small exit for the team.

Result:
Time ~ instant (or 90 days)
Hope they work at your co. for 5 years
You are paying $200K per person for an instahire situation.  (more if you count options, raises, more payments and “other” but trying to simplify)

Hiring Option

Hire 2 people per month ~ $100K/month/per person across 12 months is 24 people at a $2.4MM burn rate.  This obviously does not include ANYTHING else you need to be spending money on like office, computers, insurance, food, other so lets double it and call it $5MM

You get a stellar group that takes approx. 1 month per person to get up to speed (I think this is generous) so you are not running at full speed for 1.5-2 months per person.

Result:
Time ~ 10 months (but really longer in my opinion)
Have equal to or less than team in 5 months – hope they all can work well together – and get them up to speed on your product.

conclusion?:
Time is now an important ingredient to a startup trying to crank something and suddenly $200K per head for an “insta-team” situation makes a lot of sense.

I believe that you can buy a fully functioning machine, and pay a premium – or you can buy all the parts and assemble a machine yourself.  In the example of buying a car, buying the parts is most certainly not an option, and you are better off buying the finished product from a safe and stable Company.

A million things could go wrong with each scenario above – and I am sure I am leaving parts out, but I wanted to get my thoughts down after the request.

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Comcast to Acquire Plaxo

It was announced today that Plaxo will be acquired by Comcast – or at least they have entered into an agreement for this to happen.

An important piece of the announcement that grabbed my attention:

Plaxo and Comcast have been working together for the past year on a number of initiatives. Plaxo is providing the universal address book for Comcast’s SmartZone communications center (slated to launch later this year), and we are also now hosting all of the address book accounts for Comcast webmail users. Our partnership has already more than doubled the reach of the Plaxo network, bringing the total number of accounts to nearly 50 million.

What does this mean for the Social Networking space? This definitely puts some pressure on those who are looking at certain networks. Although the terms of the deal were not disclosed, I suspect that the price will be the new benchmark for social media net buyouts and be the latest “comp” for comparisons.

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Yahoo Acquires Blue Lithium

Marketing.fm‘s own Lee Jones predicted on August 8th that Yahoo was looking to acquire Blue Lithium, and it has now happened.

The deal, for approximatley $300 million in cash, comes at a time where the behavioral target market is heating up.

From the Yahoo official blog:

Yahoo! just entered an agreement to acquire BlueLithium, one of the largest and fastest growing online global ad networks with a stable of direct response products and tools for advertisers and publishers. BlueLithium runs the fifth largest ad network in the U.S. and the second largest in the U.K., providing access to valuable audiences and increasing our ability to sell performance-based campaigns both on and off our network.

BlueLithium also has an official posting on their homepage.

[tags] acquisitions, marketing.fm, bluelithium, yahoo [/tags]

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WPP: Marketing Cannibalization?

Sir Martin Sorrell has a keen eye for acquisition (both hostile and friendly) when it comes to the marketing services industry. In the last year, Sorrell has taken an interest in online media & technology companies such as Wild Tanget, JumpTap, Video Egg, and most recently: 24/7 Real Media.

WPP’s strategy is remarkably different from other holding companies. As agencies struggle to meet the demands of new marketing, it appears that WPP is trying secure media outlets and for it’s client base in addition to it’s pursuit of interactive service expertise.

One might trace the roots of this investment strategy back to Sir Martin’s “Friend-Enemy” description of the Google-WPP relationship (WPP spent $200 Million+ with Google in 2006). As more and more media spending shifts online, Sorrell would like to squeeze as much as possible out of each budget.

As far as I’m concerned, this raises some serious ethical questions for WPP:

How will WPP’s media and advertising agencies make unbiased decisions when it comes to budget allocation?

While certain discounts will be undoubtedly be appreciated by clients, will the integrity of a brand’s marketing budget be sacrificed for the future success of WPP?

There is a reason that marketers contract media agencies to plan and buy: clients want expertise and relationship leverage in order to maximize the efficiency of their spend. If WPP purchases 24/7, will buyers still be able look at each and every ad network campaign opportunity equally?

Perhaps WPP should focus more on the evolution of some of its behind-the-times portfolio agencies (Grey Global Group?).

Related Links:

Advertising, Media & The Digital Revoultion

WPP: Group M Interaction Strategy Study, April 2007

[tags] Sir Martin Sorrell, WPP, 24/7 Real Media, Marketing.fm, marketing blogs, advertising, M&A, acquisitions, Ad Agencies [/tags]

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Google Acquires Tonic Systems – Announces Presentation Software

Google LogoTonic Systems

Google announced today that they have acquired Tonic Systems in an effort to strengthen their Google Docs & Spreadsheets offering with a new feature – presentations. This is the latest in a string of acquisitions that are ramping up Google’s office suite. They now have a word processor, worksheet program, and now a presentation program. Many people think that this is a direct threat against Microsoft Office, and others question the efficacy of such online based tools.

Personally I am excited to see further innovation in the online space and I am looking forward to Google integrating all these systems under one roof. I have been using Jot for awhile now, and I can imagine the Google Docs system being fully integrated into JotSpot. This would be ideal as it is the focal point for me using online web apps for business. (Well, for this blog anyway).

What do you think the next naming convention will be for “Google Documents & Spreadsheets”? (Hopefully they will not just throw presentations on the end making it; Google Documents, Spreadsheets, & Presentations”)

[tags] Tonic Systems, Google Office, Google, marketing.fm, Google Docs [/tags]

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