Try Before You Buy

Companies are using alliances to take the risk out of acquisitions.

When Andreas Mueller-Schubert decided to move his company into the home entertainment business, he knew he would have to buy another company to do it. His company, Siemens Communications’s Fixed Network Solutions, provides broadband Internet service providers with the array of add-ons (such as Internet telephone service) they use to attract new subscribers. By 2003, customers were asking about a new technology: television service piped over the Internet, known as IPTV.

Mueller-Schubert, president of the Siemens division, began searching for promising acquisition targets. He soon found one: Myrio, a Bothell, Washington-based start-up with software that enables the various features of IPTV, such as video on demand. “This kind of middleware is the brain of the solution,” says Mueller-Schubert. “If you want to be a leader in this market, it’s a strategic asset you have to own.”

But buying a start-up in the high-tech business is risky. Technology changes fast, and companies often discover too late that they’ve placed the wrong bet. The target’s products may not work well with the buyer’s products. And, of course, fitting sometimes eccentric entrepreneurs into a large bureaucracy may prove futile.

Siemens’s answer was to hedge. Instead of buying the company outright, it signed Myrio up as an OEM partner in late 2003. Shortly thereafter, Mueller-Schubert persuaded Siemens Venture Capital, the corporate-venture arm of parent Siemens AG, to take a 15 percent stake in Myrio, enough to secure a seat on the board. Two years later, after getting to know the business firsthand and building relationships with the company’s managers and engineers, Siemens bought the rest of Myrio.

The result was a fast integration that retained the key people. “When you buy a technology company, you’re buying the recipes they’ve created, but you also want to keep the cooks,” says Mueller-Schubert. “And we hardly lost anyone.”

Siemens is by no means the only company to use alliances as a step toward an acquisition (see “Allied Success” at the end of this article). Motorola does it occasionally. San Francisco–based drug maker Amgen did it in January when it bought Abgenix, a biotechnology firm with which it had had a licensing and development deal since 2002. Microsoft did something similar last year when, after three and a half years of close collaboration with Groove Networks on development and marketing, it bought the Beverly, Massachusetts-based company. That deal also yielded Microsoft a distinguished new chief technology officer — Ray Ozzie, the founder and CEO of Groove Networks and the inventor of Lotus Notes.

When done right, preceding an acquisition with an alliance can improve the chances that the deal will succeed. A 2004 study found that a prior alliance increases the postacquisition return on assets for the acquirer. And companies that rely on this technique report success. Motorola measures the performance of its acquisitions annually, reviewing their performance over five years or more. According to Don McLellan, corporate vice president and director of M&A at Motorola, the difference between deals preceded by a collaboration and others (such as those pitched by bankers) is striking. “It’s absolutely the case that those [with previous alliances] tended to be the ones where we had more success,” says McLellan.

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