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Opposites Attract

A look behind the seemingly random world of acquisitions
February 1, 2006
URL: http://www.entrepreneur.com/article/82950

When eBay bought broadband phone company Skype last fall, eBay CEO Meg Whitman said the acquisition would create "an extraordinarily powerful environment for business," making it easier for buyers and sellers to communicate.

The same week, entrepreneur Richard Branson announced a deal with Brown-Forman Corp.--the company behind Jack Daniels and other spirits--to produce Virgin Vines, a wine label including a red shiraz that retails for $10, along with the quirky motto "Unscrew it, let's do it."

These deals may elicit a head-scratching "Huh?" from people who don't see how combining forces extends either party's core business. So what can you learn from these entrepreneurial stars about expanding in an unexpected way?

Such deals are an attempt to "own" the customer and grow when revenues are flat, "even though there's no immediate synergy," says Ken Bender, managing director of Software Equity Group, a San Diego-based technology investment bank. Buyers are also looking to enter new markets: Approximately 20 percent of the 1,700 software and IT service acquisitions in 2005 were market-extension plays that "look like the eBay-Skype type," Bender says, "where you're kind of scratching your head, going, 'What's that about?'"

But beneath the surface, they can make perfect sense. For eBay, "it's a very strategic acquisition," says Peter L. Coffey, president of Association for Corporate Growth. Both eBay and Skype undoubtedly saw other mergers in the internet-phone market, with Microsoft buying Telio and Yahoo! buying Dialpad. But eBay also wants to build on its franchise. "eBay's got this community that's constantly looking to them for product leadership, and they want to communicate," Coffey says. "If you accept the fact that they're specifically good at internet communication, here's the natural extension--internet-based phone communication."

Still, if you're considering an unexpected expansion of your own, know that nearly 65 percent of acquisitions fail, usually because the selling price is too high, management issues get in the way, or company cultures clash--for example, the other company doesn't value R&D as much as yours does. It's important to do as much listening as talking when you navigate an acquisition. "What you're trying to find out is what they value and why they think you're strategic to them," Coffey says. "Ask, 'Will that company enable me to take business to the next level? And are they bringing something I can't?'" Ask all the right questions, and a potentially strange bedfellow might not seem so strange after all.