Thursday, October 04, 2007

The M&A Primer - eBay Should Take Note

There is a great post today at BusinessWeek.com entitled “When Big Deals Go Bad—and Why” this is even more important for eBay watchers in light of eBay's recent write-down of the value of their Skype acquisition.

It’s a great read. My take in a nutshell: Stick with making deals in your core business in other words don't try and become a Telco when you are really an online marketplace business and don't make a bet on a new business on the hunch that you can integrate it into your operations. PayPal already worked with eBay, which made sense to buy it. Skype wasn’t being used on eBay so it must have been arrogance or a wild bet to think it would integrate well with eBay.

Pay close attention to the profile on Cisco as a model for sold acquisition strategy:

"To put such failures in perspective, it's helpful to understand what makes a good deal work. Companies with solid track records in M&A, such as Internet-equipment maker Cisco Systems (CSCO), tend to buy on a regular basis. They have methodical processes for selecting targets and integrating businesses postdeal. And they don't buy companies to prop up earnings or to enter dramatically new lines of business.

"We don't favor large, transformational deals," says Ned Hooper, senior vice-president of corporate business development at Cisco (BusinessWeek.com, 4/9/07). "We think M&A works best when it is part of a regular and stable business process. The best deals tend to bolster existing lines of business, or open new lines of business in adjacent markets. And we don't do deals to boost near-term earnings. We do deals to acquire promising new technology and to capture market transitions to open up new areas of growth." It may not hurt that buyers such as Cisco tend to work on their own, without much outside influence from investment bankers. Hooper runs Cisco's M&A group as part of its overall business development unit, vetting ideas for acquisitions with his team. "
With eBay sitting on $3 billion in cash and a $3 billion credit line plus a rising stock price. It might be wise for management to take a short M&A history lesson before their next big move.
Just my 5 cents!

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