Mergers in the digital economy

Interesting paper implicitly supports your hypothesis that major firms are constrained by properly trained talent.

Using evidence (175 recent acquisitions btw 2015-2017) from Google, Amazon, Facebook, Amazon and Microsoft the study finds that firms are largely using M/A activity for buying R&D: “…We run Probit regressions to better understand the determinants of product discontinuation….We find that younger firms and those in the core business segment of the acquirer are more likely to be discontinued. This suggests that most acquisitions are undertaken to reinforce the firms’ innovation efforts by purchasing R&D efforts and talents or to add functionalities to their core products. Again, this could be a sign that acquisitions are used to reinforce a business model rather than to develop competition….”

“…Over the period 2015-2017, the five giant technologically leading firms, Google, Amazon, Facebook, Amazon and Microsoft (GAFAM) acquired 175 companies, from small start-ups to billion dollar deals.By investigating this intense M&A, this paper ambitions a better understanding of the Big Five’s strategies. To do so, we identify 6 different user groups gravitating around these multi-sided companies along with each company’s most important market segments. We then track their mergers and acquisitions and match them with the segments. This exercise shows that these five firms use M&A activity mostly to strengthen their core market segments but rarely to expand their activities into new ones. Furthermore, most of the acquired products are shut down post acquisition, which suggests that GAFAM mainly acquire firm’s assets (functionality, technology, talent or IP) to integrate them in their ecosystem rather than the products and users themselves. For these tech giants, therefore, acquisition appears to be a substitute for in-house R&D. Finally, from our check for possible”killer acquisitions”, it appears that just a single one in our sample could potentially be qualified as such…Our classification reveals the following: most acquisitions are undertaken in segments in which the GAFAM firms were already active. According to our classifications, around 36 % of the acquisitions are in the acquiring firm’s main business segment and around 82% occur in segments in which the firms were already active. This suggests that these firms are using their M&A activity mostly to strengthen their current business models, and do not seek to increase direct competition between them by entering new markets. There are, however, two exceptions to these findings. The first one concerns the segment of products for business customers, in which Microsoft, Amazon, Google and Apple have acquired substantially. This could be a sign of increasing rivalry between them for these customers, given that Google and Amazon clearly want to compete with the current market leader, Microsoft. The second exception is Google. Compared to the other four firms, Google not only acquired the most in absolute terms, but did so in all six segments, including those in which it was not extremely active yet. Hence, Google appears to have a more aggressive M&A strategy and to intend to compete with all firms in most segments….We further analyze the acquisition strategies of the GAFAM firms by looking at the evolution of the target post-acquisition. We observe that in the vast majority of cases, the acquired brands are discontinued by the acquirer. A product is considered to be discontinued if it is no longer supplied, maintained or upgraded under its original brand name. We observe that in 60% of the acquisitions, the acquired products were discontinued. The product remains supplied under its original brand name in 27% of the acquisition cases. Product discontinuation reveals important insights into the reasons for acquisition. Firms can be acquired for their products and customers or for their assets and their R&D efforts….In the former case, the product is likely to be maintained under its original brand name while in the latter case, the product is likely to be integrated in the firm’s ecosystem. Hence, mergers motivated by asset acquisition are more likely to be discontinued. We run Probit regressions to better understand the determinants of product discontinuation….We find that younger firms and those in the core business segment of the acquirer are more likely to be discontinued. This suggests that most acquisitions are undertaken to reinforce the firms’ innovation efforts by purchasing R&D efforts and talents or to add functionalities to their core products. Again, this could be a sign that acquisitions are used to reinforce a business model rather than to develop competition. We also find that Apple and Facebook have a more systematic discontinuation policy…Our analysis leads us to conclude that most of the acquisitions made over the period considered were driven by asset acquisitions. Firms buy valuable innovations, functionalities or R&D to strengthen their main segments. By doing so, they improve their products’ ecosystem and reinforce their position in their already strong market positions. We find no evidence that this intense M&A activity leads to more global competition between the GAFAM firms. Finally, we find no evidence in our sample that killer mergers are widespread, but just one potential case that would have deserved closer investigation by competition watchdogs. …When reviewing all GAFAM acquisition cases in our sample, two eye-catching patterns come out. First, most acquisitions are undertaken in core segments or other segments in which these firms are already active. Second, the majority of acquired products is discontinued post-acquisition. This suggests, first, that many GAFAM acquisitions are driven by the desire to purchase valuable R&D inputs, such as the technology, IP rights and/or people of the target firms. Overall, more than 60% percent of the acquired products are shut following the transaction. This figure suggests that many mergers qualify as technology or talent (acqui-hire) acquisitions. Second, the focus on already known and important segments raises the question whether these acquisitions are undertaken to increase market power or to realize synergies. The answer to this question is far from obvious and would need a case by case analysis. However, given the small size of target products, not just in revenues but also in terms of employees, classical synergies, like economies of scale and scope, seem rather implausible. Except for beneficial effects on innovation, the likely motives in these cases are the desire to improve market positions and to increase market power by adding new functionalities to their already successful products. The flip-side of this focus on core segments is that entry seems to be a rare motive to undertake acquisitions. Hence, GAFAM’s main motivations in the digital economy appear to be the acquisition of innovation assets as well as the wish to increase market power.21 Synergies and market entry, on the other hand, seem to be play less prominent roles…”