When the economic growth began slowing in 2015, M&A activity among tech companies cooled as well. Recent data from CB Insights found five of the eight "tech giants" decreased their M&A activity from 2014 to 2015. Collectively, the companies made just 71 acquisitions in 2015, down from a total of 101 in 2014.
As the first quarter of 2016 comes to a close, M&A activity is still slowly plodding along. But a few organizations are bucking the trend, gobbling up other companies. Take Cisco and IBM, for example. Cisco recently bought six companies in less than five months, including OpenDNS for $635 million and IoT provider Jasper Technologies for $1.4 billion. And IBM, despite falling revenues, executive departures and mass layoffs, purchased IRIS Analytics, a German company that specializes in preventing payment fraud through the use of analytics, and digital marketing creative agency Resource/Ammirati in January. Last October, Big Blue bought the Weather Company’s business-to-business, mobile and cloud-based web properties for $2 billion.
With widespread market uncertainty, why do organizations like Cisco and IBM continue to snap up other companies?
The need for speed
Much of Cisco and IBM’s M&A activities stems from their efforts, as older tech companies, to refresh their products and business strategies. Purchasing other companies, especially if they are already somewhat "proven," can give Cisco and IBM a short cut to new solutions or technologies.
"Innovation moves very quickly in technology," said Tony DiBenedetto, CEO of Tribridge. "If you wait to build a capability or solution, you may miss the opportunity to capture market share. Often, it’s driven by the speed at which a solution can be developed."
For example, DiBenedetto said, Tribridge entered the human capital management space a few years ago through acquisition. The move was based on growing customer demand, but Tribridge had no expertise in the area.
"We couldn’t afford to wait and build it ourselves because we didn’t have the credibility in that space. The acquisition helped bring in the skill sets, customer base and opportunity to cross-sell into our existing customer base," DiBenedetto said.
Since then, DiBenedetto said, Tribridge has tripled that part of the business.
Moving the mountain
Cisco and IBM are huge companies that struggle to move quickly. But the technology world is changing, and in order to survive, companies like Cisco and IBM must change too. Both companies are rooted in hardware and one-time purchase sales models. Now, they need to try and pivot to cloud infrastructure and other subscription-based business models without upsetting longtime, revenue-generating customers.
For Cisco and IBM, buying rather than building new tech capabilities is all about helping turn the ship, according to Joan Fazio, senior director of Product Marketing for Business at video communications company Blue Jeans Network.
Krish Ramakrishnan, a former Cisco executive, started Blue Jeans after seeing a need in the market for an enterprise-grade video communications service. Ramakrishnan built Blue Jeans for the cloud from the ground up.
Before Blue Jeans, if a company used a Cisco room system it could only connect with others that used a Cisco conference system. Blue Jeans was the first fully inter operable, cloud-based bridge between all video conferencing services.
"The advent of the cloud changed the whole tech game and suddenly the major tech players like Cisco and Polycom, so entrenched in hardware, have found themselves playing catch up to more nimble, scalable players in the cloud," said Fazio. "That's why the incumbent's technologies, whether its video conferencing services or data centers, will always be one step behind. Sometimes it's easier to apply dollars to an already built tool rather than take the time to create something new."
So companies like IBM and Cisco often employ a team of people to keep an eye out for companies succeeding in areas they’re looking to get into.
"They tend to go after whichever company has either come up with an innovative solution or has advanced a concept beyond paper and has some customer or technological validation," said Aftab Jamil, co-leader of the Technology & Life Sciences practice at BDO. "So in that way, it’s much cheaper for them to purchase a company both in terms of having a leg up on solving some hard problems as well as because of the shorter time to market."
In addition to market speed, purchasing another company can allow a Cisco or IBM to get the technology they need at a reasonable price and then add their own "secret sauce."
"Acquisitions can work well for a service or solution that isn’t mature in its development," said DiBenedetto. "If you don't try to acquire the most expensive or leading-edge technology, you can buy it at a reasonable price and this gives you the ability to build innovation on top of it."
Or, if a company has already started developing or has completed building new tech in-house, a purchase may help add more value to it.
"A company can purchase another company and then perhaps bolt their solution onto the solutions that they already have," said Jamil. "That might spice up what they’ve already started with an extra perk or value-add that can make it even better."
Of course purchasing another company does not come without risks. Companies like Cisco or IBM do a good deal of homework before they write a check. In many cases, they work with the company they hope to purchase ahead of time and may even invest in them before making a bid.
"Partnering or investing in a company gives them a front row seat to see where the technology is going before they make the purchase," said Jamil.