Two Tech Giants — and Two Very Different Acquisition Strategies

Alphabet’s M&A feeds its core enterprise; Amazon’s extra more likely to push into new areas

Google’s dad or mum firm, Alphabet, and Amazon have appreciable claims to innovation — growing in-house the world’s dominant search engine and the most important cloud-computing operation, respectively.

But neither constructed out its sprawling company presence of in the present day— they’ve a mixed market cap of practically $3 trillion — solely with homegrown concepts or expertise. They made scores of main acquisitions. Does their strategy to M&A present a street map for the way a profitable tech disruptor goes on to develop into an enormous?

Two street maps, really, as a result of their acquisition methods are notably totally different, University of Florida’s Gwendolyn Ok. Lee and UCLA Anderson’s Marvin B. Lieberman clarify in a paper revealed in Industrial and Corporate Change. “There is not any single proper approach to make the most of acquisition versus inner improvement,” they report. Specifically:

Alphabet’s core Google search enterprise, as soon as up and operating, went on an acquisition tear to construct out its capabilities and lengthen its dominance. Lee and Lieberman present that Alphabet’s charge of acquisitions for brand spanking new companies was 2.6 occasions the speed for Amazon.

Amazon, as soon as it had established its on-line guide retailing operation, labored internally so as to add music and video and then, ultimately, all the pieces. It additionally constructed Amazon Web Services, its cloud-computing cash machine, in-house. And it constructed its large third-party vendor and logistics enterprise, Amazon Marketplace, itself, piggybacking by itself warehouse and on-line gross sales operation. Its acquisitions have been fewer and extra more likely to be companies it’s not but concerned in. 

AMZN Revenue (Annual) knowledge by YCharts

A longstanding, if evenly documented, idea urged that companies used acquisitions primarily to enter new companies.

Lee and Lieberman determined to check that idea. In a 2010 paper, revealed in Strategic Management Journal, they analyzed greater than 1,700 acquisitions made by 163 public telecom companies over a 15-year interval. That led them to a extra nuanced understanding of the technique behind acquisitions. They discovered that companies opportunistically used acquisitions to fill in holes of their present product line, in addition to for forays into fully new traces of enterprise.

Filling in holes is exploitation. Entering new fields is exploration. Returning to this matter, Lee and Lieberman determined to look at the approaches of Alphabet and Amazon.

Amazon: Build It Yourself, Then Add Complementary Finishes

In 2022, 28 years after Amazon’s launch,  its annual outcomes included $220 billion in gross sales from its on-line retailer; $118 billion in third-party vendor providers; $80 billion from extremely worthwhile Amazon Web Services. All of those are massive companies constructed in-house. Amazon additionally stayed in-house to develop the {hardware} (Kindle e-reader, Kindle Fire pill and FireTV).

Amazon used acquisitions so as to add complementary companies. Rather than simply be a toll taker for third-party sellers, Amazon picked up on-line shoe retailer Zappos in 2009 and diaper service Quidsi in 2010, successfully shopping for their method into slicing out the intermediary for these two merchandise. And whereas Amazon Studios was an inner undertaking launched in 2010 to feed the Amazon Prime content material beast, in 2021 the corporate purchased MGM Studios to increase its film and tv library. The 2020 buy of autonomous car agency Zoox is an apparent complement to its core enterprise of package deal supply.

Amazon has notably purchased companies to realize entry to completely new enterprise traces. Online sport streamer Twitch in 2014, Whole Foods in 2017 and One Medical in 2022 are three of its largest purchases aimed toward  gaining a brand new foothold.

Lee and Lieberman observe that Amazon’s use of an inside-outside strategy may be very a lot in play with Amazon’s AI-related companies. Alexa Voice Service and Amazon Web Services are home-grown, however Amazon additionally purchased different AI providers together with Yap, Evi, Graphiq, Ivona and Orbeus to construct out these enterprise traces.

Alphabet Buys to Grow Its Core

After launching its search engine in 1998, Google quickly adopted a development technique that relied on acquisitions to construct out its main enterprise area. Its first main acquisition was Applied Semantics in 2003, which delivered its useful AdSense know-how for serving up contextual adverts on search consequence pages. In 2007 it scooped up DoubleClick, the grasp of on-line banner adverts. The 2006 buy of YouTube gave Google content material to draw extra eyeballs it might serve up adverts to.

Lee and Lieberman say Google tends to go on procuring sprees to rapidly construct out a brand new enterprise. The authors distinction this with Amazon’s extra deliberative, one-at-a-time strategy to acquisition.  

For occasion, Google’s 2005 buy of the Android cell phone tech was a decidedly massive step into a brand new discipline. One it appeared might need been on Google’s thoughts a yr earlier when it bought the tech that turned Google Maps. And within the first decade after buying Android, Lee and Lieberman level out, Google made greater than 30 acquisitions to enhance the cell phone service, together with cell advert tech agency AdMob in 2009, which facilitated Google’s core enterprise of advert serving. 

Google Cloud has its origin in an app developed internally in 2008, however the service was then just about constructed on the acquisition of greater than two dozen companies with important tech for the cloud platform. 

The Google Skunkworks

But there’s in fact the moonshot wrinkle to this. 

Though it has boatloads of cash to purchase up absolutely anything, Google has, up to now, been resolute in staying in-house when pursuing fully new fields removed from its main enterprise area. Google X, a separate division of inner R&D launched in 2010, is concentrated on big-ticket exploration that if profitable repay years down the road, not in some close to quarter. Success has been muted. Google Brain is the home-grown AI initiative that’s now being deployed throughout Alphabet merchandise and providers. The self-driving automobile gambit Waymo that’s now on the streets in Phoenix and San Francisco began as a moonshot undertaking as nicely. Still, in 2022 Google reported an working lack of greater than $6 billion in its “different bets” that features moonshots. 

“Alphabet’s use of inner improvement to launch its sequence of moonshots is notable not solely as a result of it goes in opposition to the norm for giant corporations but additionally as a result of it goes in opposition to Alphabet’s robust reliance on acquisitions inside its main enterprise area,” they write.

And but provided that Google’s development story is not any much less compelling than Amazon’s, the takeaway appears to be vive la distinction. “Taken collectively, our comparability of the 2 corporations gives an ‘existence proof’ that totally different modes of entry can result in related ranges of company development,” Lee and Lieberman conclude.

https://anderson-review.ucla.edu/two-tech-giants-and-two-very-different-acquisition-strategies/

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