When a company is acquired, the price paid is usually higher than what the company is worth. This is because there is a “control premium” that needs to be paid so that the acquiring company can control the destiny of the acquired company (while the seller loses that right). So the question has to be what does the premium (or excess cost) buy? What is the value of that control? What will be the new destiny? Whose destiny is changed?
Clayton Christensen succinctly defined the value in any company as the sum of three constituent parts: resources, processes and 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 that the buyer throws away most of the real value in the company.
For example, when looking at Skype through Microsoft’s eyes, they could be valuing it for its resources (employees, management team, customers, or intellectual property.) Or they could be valuing its processes (how it makes software and how it recruits customers) or it could be its business model (viral distribution, very low prices with wide distribution, plan to disrupt telecommunications). Each of these is a separate, mutually exclusive deal with separate integration plan and separate strategic justification. Each is targeting a separate Skype.
If Microsoft were to pay a premium for Skype’s resources then they will probably not make use of the processes or business models. There is some value in this Skype. Microsoft could use the customer base to sustain their existing businesses and to up-sell services.
But what if the real value is not in resources but in the business model? A model which would allow for Microsoft to disrupt its core business. Perhaps Microsoft could use the Skype approach to creating new customers, eliminating its partner network and expensive direct sales force. This would be a different Skype. It would have the potential to transform Microsoft. Microsoft could become what Skype is now: a communications network or carrier that disrupts the way people use network operators.
This type of value exists in Skype but its asymmetry with Microsoft’s core would make it a very tough sell internally. A recent article pointed out that when Skype was up for sale last time, Google’s acquisition was sabotaged internally by people who realized that peer-to-peer would be “incompatible” with the centralized architecture of Google’s services. If not for the effort of certain individuals, Google might have ended up with Skype and destroyed it with internal antibodies.
Chances are that Microsoft paid for Skype’s customers and engineers but will not apply the innovations of viral peer-to-peer distribution or disruptive voice pricing. If that happens then perhaps Microsoft will pay $8.5 billion for the wrong Skype and telecom disruption will find another home.
Adapted from an answer published in Capital.bg. My thanks to Adrian Georgiev for asking the right questions.