2015 was a year packed with mega acquisitions, small strategic deals, spin-offs and collaborations – in short, a year in which the corporate structure of many companies changed while several others ceased to exist.
It was the year in which Google renamed and restructured as Alphabet GOOGL, acquiring a new logo, new business focus, new CFO and hopefully, more transparency. Alphabet was formed to separately hold Google assets and other endeavors (Xlabs, Nest, Fiber, Calico, Life Sciences, Google ventures, Google Capital, etc.). We explored the possible reasons for the decision here.
Google and J&J Got real close this year. In April, Google said that it would be assisting J&J medical device company Ethicon to develop robots that can operate as surgical assistants thus increasing the number and accuracy of procedures. In December, Google’s holding company Alphabet spun off its life sciences unit in collaboration with J&J. The unit, which will be called Verily will use J&J’s expertise in medical devices and Google’s machine learning skills to develop robots for surgical operations.
Another Internet company, Yahoo, saw significant upheaval as it failed to get advance IRS approval for the Alibaba spin-off. Instead, the IRS announced that it was looking to make new rules targeting companies that take the spin-off route to avoid paying taxes. Without the tax savingsthe spin-off doesn’t make sense. So investors who had been holding the shares to unlock the value in Alibaba and Yahoo Japan Holdings had enough. Some started calling for a dismissal of CEO Marissa Mayer while others (notably Starboard) called for a sale of the core business, leaving Yahoo as a shell company holding the Asian assets. Verizon has expressed interest and there could be other contenders as well given that Yahoo has a large and engaged user base and some of the most valuable services such as email and finance. Meanwhile employees are jumping ship due to the increased uncertainties.
There were also a couple of major splits this year, the first of which was eBay, which separated from PayPal to focus on its marketplaces business. PayPal needed to operate more nimbly in order to succeed in the increasingly competitive online payments segment. It was thought that eBay would also be able to operate more effectively without the need to support its payments arm. The other was Hewlett-Packard’s decision to split its enterprise (Hewlett Packard Enterprise, or HPE) and consumer-facing (HP Inc, or HP) businesses to increase focus on the growing diversity within. Both markets are highly competitive, so growth won’t come easy. Both these splits were announced last year and completed in 2015.
There is an ongoing trend of Chinese companies delisting from the U.S. and going back to China where they can command higher valuations. Last year saw leading Internet security and search service provider Qihoo 360 going private in preparation for a China listing later on. The transaction will close next year.
Acquisitions Galore
KPMG predicted in its 2015 M&A Outlook Survey that the U.S. would be the most popular deal destination this year driven by low interest rates, record stock prices, improving employment big cash balances. The healthcare/pharma/life sciences, technology/media/telecom, energy and consumer sectors were expected to be the biggest drivers with players mainly looking for opportunistic purchases, geographical expansion, customer base increase and expansion into new markets as the primary objectives. The prediction appears to be on target as you can see below-
Google bought Softcard: Google pioneered NFC technology but one of the reasons it didn’t really take off in the U.S. was because carriers in the region (AT&T, Verixon and T-Mobile) had combined to create their own NFC wallet called Softcard. Things changed after Apple Pay launched with some initial success. So they sold the assets to Google and agreed to pre-install Google Wallet on their Android smartphones.
Intel’s INTC smart glass push included the Vuzix and Recon acquisitions: Intel spent $24.8 million to acquire fashion accessories maker Vuzix, which develops aesthetically pleasing designs for smart glass, gaming, virtual reality and other devices. Intel also invested $17 million to speed up Recon’s glass-building efforts or buying that company soon after its sporty eyewear made its way to store shelves. Intel is retaining the brand.
Expedia EXPE bought Orbitz to grow its travel booking business, particularly in the air travel segment where Orbitz is very strong. It also took in HomeAway, which is a listing site for apartment rentals, in order to expand into that relatively unmanaged segment. Priceline already has a competing service and Airbnb is getting stronger every day. It spent $1.6 billion and $3.9 billion on the two deals, respectively.
Verizon’s VZ $4.4 billion purchase of AOL was an attempt to acquire content and ad technology in order to differentiate its business and help it deal with the tensions of inherent commoditization in the core business and pressure from content providers and users.
IBM IBM spent a billion dollars to buy Merge Healthcare, which has developed software to process, store and access medical images. IBM will use the technology to further build out Watson Health Cloud (already used in 7,500 healthcare locations across the U.S.).
Dell-EMC: Dell’s $67 billion purchase of EMC was made with the intention of creating a computing behemoth with the ability to serve every enterprise need from client devices to cloud storage. Software and services are an important part of this strategy and one of the main reasons for the price tag is EMC’s 81% share of virtualization company VMware. Dell will spin out a company with 53% of VMware share value as tracking stock for existing holders thereby retaining all the control and rights related to VMware shares. It will pay the rest in cash. This is likely a temporary arrangement until it can buy out the rest of the shares. Dell is reportedly raising around $50 billion in debt to fund the deal along with other investment partners including Silver Lake.
Pandora-Ticketfly: Pandora agreed to pay $450 million in cash and stock for Ticketfly, a popular destination for event and concert tickets in the U.S. and Canada. The ad-supported radio service says that the deal will build on its Artist marketing Platform (that displays most popular shows by geography) and Next Big Sound acquisition (an analytics-type service studying listening and searching patterns). Ticketfly, which sold 16 million tickets last year, takes this a step further because it can help artists sell concert tickets to Pandora users. It also announced the acquisition of analytics company Next Big Sound in an attempt to strengthen its Artist Marketing Platform.
Alibaba-Youkou Toudou: Alibaba, which currently owns 18.3% of the company, is looking for the remaining shares of online video company Youku Tudou. There is some local competition here in the form of Baidu’s iQiyi and Sohu Video, but no American players like Google’s YouTube and Netflix (yet).
ActiVision-KingDigital: ActiVision is using $5.9 billion in mostly balance sheet cash to acquire Candy Crush maker King Digital in its second largest deal ever. The acquisition will reportedly boost its 2016 EPS by 30%. There’s minimal customer overlap since ActiVision focuses mainly on consoles to target its half-billion customers while King is entirely into the emerging mobile games segment (19% of total dollar spend on video game software based on TTM revenue in Sept 2015, NPD estimates). The console installed base will not see the growth rates of yesteryears and competition will continue to increase as mobile and free-to-play gain momentum. Another bonus is King’s female user base, which adds a new dimension to the targeted demographics. For King, it’s a godsend since the company has been largely unsuccessful at duplicating its success in the Candy Crush franchise.
Chip deals
The rising cost of designing and fabricating chips, the growing complexities due to die shrinkage and the diversion of VC funding to Internet operations (where the payback may be shorter) and emerging markets (where operations cost is less) are the primary reasons for the consolidation in the semiconductor industry. 2015 was a huge year with a record number of deals.
Intel-Altera: Intel is paying $16.7 billion to acquire partner Altera. It’s a sweet marriage of complementing technologies with Intel specializing in the chip logic and Altera the ability to speed up the process. Intel promises better performance at lower costs when it integrates Altera technology into its data center and IoT offerings. It also expects to make new-age custom chips. The acquisition also offers cost synergies. Altera will benefit from Intel’s advanced process technology, which plays an important role in share gains during technology transitions. The combined company will also be in a position to target more end markets like communications and auto.
Avago-Broadcom: One of the largest deals this year, the merger was valued at a whopping $37 billion. Both companies grew through acquisitions although Broadcom was more disciplined and had higher margins. They had complementary product lines and scope for revenue synergies by cross-selling into each other’s customer base. Avago is registered in Singapore where taxes are much lower. So the combined company will also save on account of the lower taxes.
Western Digital-SanDisk: SanDisk has an interest in selling itself because of its poor execution, customer loss, 3D NAND delays and the extremely competitive market. WDC’s recent cash infusion through Tsinghua, balance sheet cash and still-low interest rates probably led it to race ahead with the deal. While there will be a near-term dilutive impact for shareholders, this is a very important acquisition for WDC ensuring it a berth in the growing SSD market.
Lam Research-KLA: Front-end semi equipment maker Lam Research has agreed to acquire process control equipment leader KLA Tencor in a cash and stock deal worth $5.08 billion. The companies expect to realize $250 million in annual ongoing pre-tax cost synergies within 1.5-2 years and $600 million by 2020. The merger creates an equipment powerhouse with a huge range of products, customer breadth and scale. The increased integration and efficiency of operations could also help the combined entity drive further extension of Moore’s Law.
Infineon-International Rectifier: The deal, valued at $3 billion was intended to strengthen Infineon’s position in auto and mobile chips and also bring it closer to the tech hub in Silicon Valley.
NXP-Freescale: First announced in March 2015, NXP Semiconductors’ $16.7 billion (including debt) acquisition of Freescale Semiconductor closed this month. The cash and stock deal creates an automotive and IoT chip powerhouse with annual revenue in excess of $10 billion and the promise of growing much faster than the market. NXP’s capabilities in inter-car and other communication chips have now come together with Freescale’s capabilities in driver assistance systems. In IoT, the new company targets home automation, wearable devices, health monitors, security and payments systems.
Micron-Inotera: Micron recently agreed to buy out Nanya’s share in their JV Inotera (Micron 33%, Nanya 67%) for $3.2 billion. Nanya also got a license to use Inotera technology for 1x and 1y DRAM technologies.
Cash Infusion/Investments
This year Alibaba invested in SingPost for the second time. Last year, it spent $249 million for a 10.4% stake. This time round it’s putting in $138.6 million for a total 14.5% stake. Another $67.8 million will go toward a 34% stake in SingPost subsidiary Quantium Solutions International. Singapore’s national postal service is likely to be of great strategic importance to Alibaba as it attempts to spread its logistics net across Southeast Asia.
Alibaba was part of a funding round in which Jet.com raised $140 million. The ecommerce site is yet to be launched but has interested investors because of a promise that its prices will be lower than Amazon based on a membership fee of $50 a year. It expects to have a user base of a million by year-end and increase this 15X over the next 5 years. Last month, Fidelity invested another $500 million valuing the company at a billion dollars.
Microsoft will be investing $100 million in ride hailing app maker Uber, to which it sold its Bing mapping unit earlier this year. Uber is seeing phenomenal success in several Asian markets, so the company hasn’t had any trouble raising funds.
Cloudflare, whose founders expect the company to go public in 2017, raised $110 million from the who’s who of tech world. And this is more than just an investment, because each will play a role in CloudFlare’s future growth. Microsoft is bringing enterprise relationships, Qualcomm Ventures is bringing compatibility with mobile devices, Baidu will take care of China market penetration, while Google is already partnered with it for the delivery of its cloud services.
Collaborations
Collaborations during the year were too many to name, but here’s a look at the most strategically important ones.
Alphabet/Google
Google is planning on operating as a mobile virtual network operator (MVNO), buying capacity from the Sprint and T-Mobile and reselling to end customers. This could be very important for Google if it is able to bundle its wireless plans with the wireline plans through its own fiber-optic network. Google wont antagonize AT&T and Verizon, but if it can provide viable competition, these two incumbents may be forced to step up their game, thus helping Google overall.
The company also partnered with MTS,Russia’s biggest mobile phone operator to promote Google voice search in its advertising campaigns and pre-install the app on the main screen of Android phones sold through its retail channels. Google will share the cost of advertising and also the ad revenues thus generated. This may be important for Google given its skirmishes with the government and extremely tough competition from Yandex search.
Alphabet’s Nest entered into a deal with SolarCity according to which the residential solar panel installer will offer a free Nest thermostat to the first 10,000 customers signing up. A Nest thermostat can lower heating costs by 10-12% and cooling costs by up to 15%.
The search giant also struck a deal with Lending Club to obtain financing for prospective AdWords customers. Google no doubt will earn something off loan referral conversions, but it also stands to gain if cash inflows or customer acquisitions are faster. The terms are attractive (borrow up to 120K for a year with 0% fixed interest for the first 6 months and 9.9% thereafter, quick quotes within 5 minutes, no additional paperwork, no origination fees, no prepayment penalties, no hidden fees and funds flow into AdWords account within three days).
Google’s once-failing relationship with Twitter appears to be on the mend. Twitter is licensing its entire firehose of tweets (6,000 a minute), so Google is finding ways of making them very visible, displaying them at times on its own properties. What’s more, the tweet itself is visible on Google search, meaning closer integration. This gives Twitter greater exposure and adds a real-time element to Google search. Another significant development is that Google veteran Omid Kordestani recently joined Twitter’s board as executive chairman and will reportedly also be involved in recruiting board members and others as well as in advising the executive leadership.
The company also recently signed a deal with Ford while pursuing other automakers according to which its experience in autonomous driving technology and Ford’s experience in building good cars comes together. This will likely be the first job its new Auto unit will undertake after it is spun out.
Microsoft
At Adobe’s May 2015 Summit in London, Adobe announced that it would be integrating its Marketing Cloud with Microsoft’s Dynamics CRM business to enable their clients to improve interaction with customers through more efficient management of their marketing, sales and service operations.
Microsoft and Salesforce announced a CRM collaboration at the Dreamforce conference that will make customers’ CRM activities in the cloud more seamless and generate additional business for the two. The specifics of this deal include Microsoft’s use of the Salesforce IoT Cloud (which can connect all kinds of devices and analyze data they generate) in combination with its homegrown Azure analytics (that picks on data related to Office 365). Salesforce will integrate Skype for Business and OneNote into its CRM services.
Microsoft also succeeded in cornering Dell and HP to put their sales forces, services and support behind its Surface devices. After creating a strong product through trial and error, it is now focusing on distribution, expecting to increase resellers from 150 to 4,500 globally within a few months. Even Gartner concluded that the tablet and convertible section of the computing market would be the fastest growing this year (up 77% from 2014), so Microsoft is targeting the right segment.
The company also inked deals with a number of Android device makers to make Windows-powered devices. It is also supporting Android rival Cyanogen.
Alibaba
Alibaba was part of Uber’s funding round in China where the ride hailing company raised $1.2 billion. But in the U.S., it also invested in Uber rival Lyft. The primary ride hailing operators in China are Alibaba and Tencent through their investment in local player Didi Kuaidi. Tencent has placed its bets on non-Uber services, blocking Uber from its popular WeChat platform, thus giving Didi a competitive advantage. It also, along with Didi, invested in San Francisco-based Lyft, which competes with Uber in the U.S.
Earlier, Alibaba and Tencent entered into an agreement to merge their competing group buying companies Meituan.com and Dianping.com in a deal worth $15 billion. The idea was to reduce competition in the already-crowded online-to-offline market, much like what they did by merging their ride hailing services Didi and Kuaidi to better compete with Uber.
Alibaba’s logistics partner Cainiao, in which it also holds a leading stake announced its agreement with the U.S. Postal service to collaborate on logistics. This should be key to Alibaba’s strategy of getting U.S. goods to Chinese customers quickly and efficiently and is likely a big deal for the Postal Service as well given Alibaba’s scale of operations.
Intel
In its pursuit of growth in the very high end server market where IBM reigns, Intel tied with Oracle. IBM has exited all other hardware lines and is now focusing on cloud software and services. IBM and Oracle compete in both chips and servers, while all the three compete in chips. This background laid the foundation for Project Apollo, which is a joint effort by engineers from Intel and Oracle to develop competing silicon offering faster speeds. Project Apollo announced that qualifying Power system users can now check out a free proof-of-concept for a simple database migration to Oracle/Intel systems. While this means lost revenue for Oracle’s Sparc processor, it’s still important for Oracle, which is at the moment losing out on both servers and chips.
Intel is also collaborating with LG in chips so the mobile device maker gets more leverage against Qualcomm. LG’s previous attempts have not been that’s successful, so it makes sense to go with a process leader that can also help the chip integration process. Actual products from the alliance will take time to come to market, but this is a big deal for LG because it will reduce dependence on Qualcomm. It’s also a big deal for Intel because it offers another way of driving penetration in the mobile market.
IBM and Facebook have entered into an agreement according to which IBM analytics will use personal data from Facebook regarding local conditions and customer preferences (Custom Audiences), combine with the information on its own marketing cloud and come up with solutions that will facilitate better targeting by marketers.
In an attempt to minimize patent litigation and increase focus on collaboration and innovation Cisco and Blackberry have entered into a patent cross licensing agreement. The details of the long-term agreement remain mostly undisclosed, but media reports state that Blackberry will receive a fee.
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