A Blog by Jonathan Low


Jan 3, 2017

Why Old Line Companies Like Ford and Walmart Are Acquiring A Taste For Startups

The traditional 'make versus buy' management decision has become easier with the realization that every business is now a tech business.

What to do about it, though, becomes more difficult more challenging as valuations rise and potential acquirers risk significant overpayment for assets whose long term benefits they may struggle to understand. JL

Eliot Brown reports in the Wall Street Journal:

Fear of seeing business disrupted, struggles to find growth, changes that require new skills—are leading more of these companies to hunt for tech deals. Old-line companies swallow(ing) tech upstarts, including Wal-Mart’s purchase of Jet.com, General Motors’ of  Cruise Automation and Unilever's of  Dollar Shave Club. (But) Startups carry high valuations that are a product of their growth potential. That makes them extremely expensive based on traditional metrics.
In late 2015, a commuter-shuttle startup caught the attention of Ford Motor Co. executive John Casesa, who runs global strategy for the auto maker. The startup, called Chariot, was growing fast and had an interesting crowdsourced reservation model, a staffer told him, suggesting a meeting.
One year and a $65 million deal later, the San Francisco van service is owned by the Detroit giant, part of an acquisition-fueled push into new areas as an uncertain and perhaps driverless future looms.
“We are in an era in our industry where M&A will be a frequently used instrument,” Mr. Casesa said.
For much of the past half-century, U.S. corporations in industries from manufacturing to retail generally eschewed Silicon Valley startups, instead choosing to build their own new products or buy established companies.
But a combination of factors—fear of seeing business disrupted, struggles to find growth, changes that require new skills—are leading more of these companies to hunt for tech deals.
In recent months, a burst of old-line companies have swallowed tech upstarts, including Wal-Mart Stores Inc.’s $3.3 billion purchase of web-discount retailer Jet.com Inc., General Motors Co.’s more than $1 billion acquisition of self-driving tech company Cruise Automation and Unilever PLC’s $1 billion purchase of online razor seller Dollar Shave Club.
Nontech companies spent nearly $10 billion buying venture-backed U.S. startups this year, nearly double the amount last year and the highest total in at least five years, according to PitchBook.
Venture-capital investors and analysts expect a flurry of deals in 2017, particularly given that funding is harder to come by in the private and public markets.
Good software is “becoming the oxygen” for established companies, said Barry Jaruzelski, a principal at PricewaterhouseCoopers LLP who focuses on research and development and technology. “People are saying, ‘I need to acquire.’ ”
The result is that Silicon Valley conferences, networking events and office buildings are gradually being infiltrated by the old guard of retail, manufacturing, insurance and other traditional sectors.

New venture-capital arms of large corporations seem to sprout up every few months, enabling their executives to mingle and hunt for partnerships and acquisitions. Entrants this year include Campbell Soup Co., Kellogg Co., JetBlue Airways Corp. and Airbus Group SE, the last two located in Silicon Valley.
Rich Wong, a partner at Accel Partners, an investor in Jet.com, said that until recently potential buyers for startups were generally confined to giants in the tech space, like Oracle Corp. and Microsoft Corp.—so much so that traditional companies in a startup’s sector didn’t come up as candidates.
Accel Partners recently counseled the founders of its invested startups to become more familiar with these older companies, an apparent gesture to the disdain startup founders often express about their corporate counterparts.
But these generally cautious corporate buyers face a dilemma: Startups typically carry high valuations that are largely a product of excitement around their growth potential. That makes them extremely expensive based on traditional metrics like revenue—and therefore inherently risky bets that can be tough for shareholders to stomach.
Wal-Mart has a market capitalization about 65 times that of what it paid for Jet.com, and it has roughly $480 billion in revenue compared with what it said was $1 billion in annualized revenue for Jet.com.
But Wal-Mart is facing ever-more competition from Amazon.com and other retailers, and executives at the company have said Jet.com will allow them to expand their e-commerce at a much faster rate.
For these older companies buying startups, “generally speaking, you are overpaying for assets right now,” said Jason Gere, a consumer-products analyst at KeyBanc Capital Markets. The deals often are a bet on the future as they try to connect with a younger generation, he said. “They’re hoping that what they’re doing is creating another avenue for growth.”
Another option is to write smaller checks, making earlier bets on young companies like Ford did with Chariot in September.
Scotts Miracle-Gro Co., the 148-year-old lawn-products company based outside Columbus, Ohio, wanted more tech-focused products and gadgets to help with lawn care, but quickly realized it would have to look outside its ranks for help, said Peter Supron, the company’s chief of staff.
“To the best of our knowledge, we don’t have an electrical engineer doing electrical engineering in the company,” he said.
After charting out the lawn-care startup landscape and many flights to Southern California—where many are located—Scotts bought two startups this month. One, called Blossom, helps make a digitally connected sprinkler system, and the other, PlantLink, makes sensors that tell gardeners when to water. Both are small acquisitions—under $10 million, Mr. Supron said—but they saved Scotts the headache of building products on its own.
“These startups can get there faster and cheaper than us,” he said.


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