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?
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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.