
In Silicon Valley, Mergers Must Meet the Toothbrush Test - jhonovich
http://dealbook.nytimes.com/2014/08/17/in-silicon-valley-mergers-must-meet-the-toothbrush-test/
======
confluence
Good. Bringing the deals in house lowers costs (ever meet an ibanker that
didn't take a decent chunk), increases flexibility (no intermediaries) and
let's deals move faster.

It's like buying and selling a house without paying for a real estate agent.
Both parties save on time and fees.

~~~
hkmurakami
This is actually Google's strategy with strategy. It's big enough that the
kind of studies management consulting firms offer can be useful to the
company, but instead of hiring McKinsey to do a study, they just hire away
their best young talent and have them join their internal strategy arm.

Considering that their associates bill at $1MM/year, hiring them away ends up
being much cheaper.

~~~
nostrademons
Google also has the brand name to do this. Leaving McKinsey to work at Google
looks great on a resume, leaving McKinsey to work at a small or midsize
company looks much stranger.

~~~
hkmurakami
Thus Google is/was the #1 destination for ex-McKinsey folks. Generally
speaking, mgmt consulting attracts more risk averse people than otherwise, so
this is somewhat natural (in fact, my risk-seeking friend who joined the firm
was surprised that so many people were risk averse).

But there are plenty of people who leave the firm to go to mid sizes places or
places with less cache, but at a relatively high position in the corporate
chain.

They also leave to join growth phase startups as well.

------
radmuzom
Question to HN - is one reason tech companies can do this is because a small
group close to the founders typically have disproportiately high voting
rights? I suspect this would not be easy to do if "traditional" institutional
investors have voting rights commensurate with their shareholding in the
company.

[http://www.theglobeandmail.com/globe-investor/investment-
ide...](http://www.theglobeandmail.com/globe-investor/investment-ideas/google-
magna-alibaba-unequal-voting-is-here-to-stay/article18734492/)

~~~
jacquesm
That depends on what you class as 'disproportionally high' and what was
written into the contract governing the investment. As long as the founders
have 51% or more and there are no blocking terms in the contracts written
prior to an acquisition offer there is nothing that can stop the founders from
selling their stock.

Savvy founders will retain control of their company even after an investment,
if only because you will never get a 100% alignment of goals between investors
and founders.

------
zxcvvcxz
>Facebook’s most recent big deal, the acquisition of Oculus VR, came as a
surprise to even seasoned technology watchers. But Marc Andreessen, a Facebook
board member, was also on the board of Oculus VR, paving the way for the deal.

Does this not seem like a conflict of interests to anyone? Isn't this the VC's
chance to exit quick for financial gain rather than have Occulus continue on
its own, which is by definition riskier?

I don't know, maybe this isn't the case but something seems odd here.

~~~
jgalt212
> But Marc Andreessen, a Facebook board member, was also on the board of
> Oculus VR, paving the way for the deal.

exactly. he came under a lot of fire for similar conflicts with they
Ebay/Skype deal.

[http://www.businessinsider.com/marc-andreessen-carl-icahn-
eb...](http://www.businessinsider.com/marc-andreessen-carl-icahn-ebay-
skype-2014-2#ixzz2wKwKNBcH)

------
wallflower
Old but still relevant article from 1999 about Cisco's king of acquisitions,
Mike Volpi (70 companies in 5 years)

>

Volpi is arguably Silicon Valley's shrewdest shopper. He needs to be. With a
dearth of engineering talent and shrinking product cycles, Cisco realized that
it couldn't build everything it needed inside the company. Says Don Listwin,
Cisco's No. 2 executive: "Lucent wants the smartest group of people in Bell
Labs. But if we're not good at something, we've got Silicon Valley. It's our
lab."

The company looks to startups if it decides it's too far behind competitors to
take the time to build a product from scratch. Once that decision is made,
Volpi's team consults with business units and customers to find out about
their technological needs. Customers have a profound influence on Cisco's
strategy. Its executives say that US West, the Denver Baby Bell, was a driving
factor behind the decision in March 1998 to acquire NetSpeed, a maker of
equipment that turns regular phone lines into high-speed digital subscriber
line (DSL) data conduits.

With a few targets in mind, Volpi and his team perform an evaluation that's
unique in scope. As engineers examine the technology and financiers go over
the company's books, Cisco's team also examines the depth of the company's
talent, the quality of its management, and its venture funding--all things
aimed at making the integration process easier should Cisco buy. Since Cisco
will acquire a company as often for its talent as for its technology, it needs
to focus on these "softer" issues early.

There's one more test. Volpi's got a knack for identifying a startup at the
sweet spot of its development: when it is old enough to have a finished and
tested product, yet young enough to be privately held and flexible in its
ways. Acquire a business that's too mature, and risk soars. Explains Volpi:
"If you buy a company with customers, product flows, and entrenched enterprise
resource systems, you have to move very gingerly. Otherwise, you risk customer
dissatisfaction. Figuring out how to integrate this type of company could take
nine months."

After all this evaluation, Cisco doesn't necessarily leap to purchase. Instead
it may pass on a company or may act as a venture firm, making a 10% equity
investment to monitor the startup's growth. That's what it did with Monterey
last winter. A few months later, after deciding that the Richardson, Texas,
startup would give it entree into the $20-billion-a-year optical-
internetworking market, it gobbled up the rest. Says Joe Bass, CEO of
Monterey: "We had interest from other companies, but they didn't move as fast
as Cisco. They were still considering us when the announcement came out that
Cisco had bought us."

...

"It's easier to integrate engineers who are rich and happy than ones looking
for a way out," says Paul Sagawa, an analyst at Sanford C. Bernstein.

"I don't believe mergers of equals work." \--JOHN CHAMBERS

Turn the conversation to Cisco, and Chambers is equally frank in discussing
its acquisition methods. As with any heavily used process, he says, there are
bound to be mistakes. For Cisco, they've arisen when the company has deviated
from its strategy by forcing a company into Cisco's infrastructure.

("It was my naivete when we acquired software companies and moved them from
their own distribution systems into ours. Dumb. Dumb.")

Or when Cisco has mistimed its bid. Valley pundits say the 1996 acquisition of
Granite Systems, a maker of so-called gigabit ethernet switches, didn't work
because Granite's product wasn't as far along as Cisco had believed.

On the other hand, people close to one of Cisco's largest acquisitions, that
of StrataCom in 1996, say it was difficult because StrataCom was too large and
its product too developed. Cisco had trouble integrating elements of its
operating system into StrataCom's switches.

This particular problem doesn't bode well, say some analysts.

As telecom equipment giants Nortel (revenues: $17.6 billion) and Lucent
(revenues: $38 billion) take aim at Cisco's markets, they say, Cisco will need
another large acquisition. Chambers, however, is forging ahead with smaller
ones, telling attendees at October's Telecom 99 conference in Geneva that
he'll make up to 25 this year.

"In a merger you can't blend resources and cultures--only one can survive," he
says. So Chambers and his team are busy scouring the world to make sure the
survivor is Cisco.

[http://archive.fortune.com/magazines/fortune/fortune_archive...](http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/08/268506/index.htm)

------
jhonovich
Poor title, but interesting observations about the value of not using
investment banks.

