Mergers and acquisitions: Their role in the dynamic online marketplace

Having already examined Apple as a powerful tech company in a previous blog, I became intrigued by the aggressive merger and acquisition market that has developed among the top tech companies and the increasing importance it now holds. Young tech companies have developed massively since their inception, Google and facebook stand as clear examples of this. These companies are heavily cash rich and actively compete among themselves to acquire the hottest new property in the tech world. There are many reasons for doing this, such as diversification, increasing market share and acquiring young talent and technologies that may grow into important sources of growth for the company in the future.

In this blog I will first look at mergers and acquisitions in a broader sense and then apply this theory to two of the larger, more aggressive tech companies that I have mentioned above, facebook and Google. Through doing this I hope to show the increasing importance of this area of the financial world with regards to the internet marketplace and how without correct regulation this may lead to the creation of powerful oligopolies.

Mergers are the joining of two equal sized companies that agree to join together, while acquisitions or takeovers are the purchasing of the share capital of one company by another. Takeovers can be friendly or unfriendly in nature. Due to the wide range of companies operational in the world today true mergers are relatively uncommon especially in the market I will be exploring. Acquisitions or takeovers on the other hand are relatively common and are of growing importance to the online tech industry with 19 recorded acquisitions by facebook in recent years and a whopping 106 for Google over a period of the last decade.

Acquisitions can take 3 different forms, conglomerate acquisitions, vertical acquisitions and horizontal acquisitions. Each of these has different consequences for the companies involved. Unlike the other forms, conglomerates are the joining of companies in different industries. Due to the different nature of the companies these are the least likely to be successful. It is also the form of acquisition that is least likely to be referred to a competition regulatory body.

Horizontal and vertical acquisitions are the joining of companies in the same industries at the same or different stages of production respectively. These are generally more successful than conglomerates and also more likely to be referred to competition regulatory bodies.

The motives behind mergers and acquisitions are clear to see. Increased levels of synergy, growth, and market share among various other opportunities for the companies involved provide the drive to acquire and merge with other companies.

There are many means of attempting takeovers, and defenses against doing so used by companies in every industry. For the purpose of this blog I will simply acknowledge the existence of these and move on instead to examining a particular market for acquisitions that is particularly dynamic and active in today’s economic climate.

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Facebook and Google are both big players on the web. Both are two of the most popular websites in the world and hold increasing amounts of power and capital. By using examples of acquisitions by these companies I will demonstrate the importance of mergers and acquisitions in this marketplace. Google, in particular is a prolific company with regards to acquisitions. It is now the most clicked website in the world and offers a wide range of services to its online customers. If we are to examine the birthplace of these ideas that are driving Google’s popularity it may come as a surprise that of its primary services offered, only gmail and its original search engine are the result of in-house Google innovation.

As I have said earlier Google has acquired 106 companies in the past decade. What I did not make clear was that over half of these acquisitions have been made since the start of 2010. Google has clearly stepped up its search for young talent and startup companies due to the increased competition it is coming under in various areas of its services provided. The evolution of facebook as a global powerhouse has certainly increased competition in the mergers and acquisitions market leading to a bitter relationship between the two. It emerged midway through 2011 that facebook had hired an outside PR company to plant negative news about Google in the public. This is just one example of the increasing competition between the two. Both are extremely cash rich companies and have sped up their search for acquisitions and mergers with young companies.

This is evidenced by Google’s vice-president of corporate development David Lawee’s exclamation mid-way through 2011 that following the acquisition of 48 companies in the previous 12 months, Google intended to step up their M & A activities. More evidence of this can be seen in the creation of the venture capital arm of Google, Google Ventures, in late 2009.

Facebook successfully merged technologies with online communications system Skype in 2011 in order to fill a gap in the market before Google had a chance to do the same. Google has also used acquisitions and mergers

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to its advantage extremely successfully in recent years, as is evidenced by their mergers with Youtube and Android, two companies who have been growing in value substantially since their mergers.

These companies are creating the future of the web through their aggressive M & A activities. The robust environment operated in by

these companies is facilitating the rise of two powerhouses of the online world. With such a robust and dynamic marketplace these two companies operate in there are questions regarding the effectiveness of competition regulators, especially due to the fact that these services are provided worldwide making it difficult for them to be held accountable in all the jurisdictions they operate in.

Should these companies continue as they are into the future, there is a danger of Google and facebook, along with other young sites developing powerful oligopolies over their marketplaces. In a young industry where these companies hold vast amounts of private information regarding their customers I hope that competition regulators become more active in examining the legality of these M & A’s due to the danger of these companies becoming overly powerful in their respective industries.

 

References:

 “Google Cranks Up M&A Machine.” Efrati, A. The Wall Street Journal, 05/03/11.

“Facebook Hires PR Firm to Plant Negative News About Google.”Aamoth, D. Time Magazine, 12/05/11.

“For Google, a New High in Deal-Making” Rusli, E.M. The New York Times, 12/07/11.

Investopedia.com

Prof. Brian Lucey, TCD. JS Applied Finance lecture slides.

“A century of corporate takeovers: What have we learned and where do we stand?” Martynova, M. & Renneboog, L. (2008). Journal of Banking and Finance.

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