So, over the course of a single year, the company has invested aggressively into companies like Zagat ($151 million), Meebo ($100 million), Wildlife Interactive ($450 million), and Channel Intelligence ($125 million). The buyouts may not lead to any returns on investment, but sometimes, the one in ten investment does.
Some may criticize Google Inc (NASDAQ:GOOG) for wasting shareholder money. But then again, no one knows what will work and what will not. In 2007, Google bought out DoubleClick for $3.1 billion. The company provided unique information for advertisers which helped measure the return on investment from marketing dollars. Following the successful integration of DoubleClick, Google Inc (NASDAQ:GOOG) was able to grow earnings by 36.60% year-over-year in 2007; this was followed by 54.25% year-over-year growth in 2009. Providing added transparency and analytics to advertisers is what turned web-based monetization from being a fool’s game into a real world science.
Microsoft Corporation (NASDAQ:MSFT) is another company recognized for its brilliance in M&A. The company spends a lot of money in mergers for similar reasons. No one knows where the next smash hit in technology is going to be. So, the best strategy is to diversify aggressively and to ruthlessly optimize core business operations in order to divert profits into acquisition activities.
Microsoft Corporation (NASDAQ:MSFT) purchased Fast Search and Transfer in 2008 for $1.2 billion. This Norwegian company made Microsoft’s Bing search engine more effective at indexing searchable content. The Bing search engine has been able to gain 0.4% market share against Google, according to ComScore. Microsoft Corporation (NASDAQ:MSFT)’s market share gains can be somewhat attributable to Microsoft’s $1.2 billion investment into search engine technologies.
Conclusion
Technology companies have leaned towards a bit of a private equity business model. The advantages include favorable tax treatment, somewhat inflated earnings figures through higher gross margins, and accumulation of intangible assets.
No one truly knows where the next $100 billion idea will come from. Maybe, Microsoft is sitting on top of it with its recent Skype purchase that was valued at $8.5 billion. Maybe, Yahoo! Inc. (NASDAQ:YHOO)’s investment in Tumblr could be worth $10 billion in 20 years. Maybe, Google Inc (NASDAQ:GOOG)’s investment into Motorola Mobility will be worth five times as much.
In the meantime, technology giants will do their best at buying their piece of real estate before it turns into Manhattan.
The article Why Tech Giants Play the M&A Game originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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