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This chapter is from the book

If You Can't Build It, Buy It

In the deal-driven climate of the late 1990s, a different and novel approach toward innovation gained great currency. Don't ally, buy! The basic idea: If you can't build it, buy it. Frothy financial markets fueled more technology deals than ever in terms of both total number and total value. Why waste all that time, money, and effort to do the dirty work of R&D yourself? Let others shed the blood, sweat, and tears, spend the cash, take the risks, and make the mistakes. Then, pick and choose and simply acquire one of the winners.

Cisco Systems was the model to emulate. As others tried to imitate Cisco, rushed and inflated bids for hot technology companies soon turned into record-setting, mind-numbing write-offs totaling hundreds of billions of dollars. JDS Uniphase alone wrote off more than $50 billion (as one observer noted, equivalent to the entire GDP of New Zealand). After acquirers spent huge sums, the technologies or markets frequently turned out to be much less feasible or attractive than advertised. Other companies found themselves holding expensive, hollow shells of companies as the targeted intellectual capital of the acquired firm simply walked out the door right after the deal closed. Entire acquisitions were liquidated for a single-percentage fraction of their purchase price or, in some cases, just completely shuttered.

Innovation by acquisition can pay off, but it's a bet that comes with a price. This price includes both the actual premium for the acquisition and all the difficulties and uncertainties of trying to successfully evaluate and integrate the target—its people, culture, technologies, customers, and more. Technology and markets can change rapidly, which can quickly outdate an expensive, big-move acquisition. Furthermore, there's no guarantee that the exact piece of R&D you need will be developed by another firm at all, that it will be on the market at the right time and at the right price, or that it won't already be snatched up by someone quicker and richer. Undue reliance on innovation by acquisition is a very risky bet.

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