It’s a crude idea, an inelegant metaphor, but it makes a lot of sense.
At a time when the financial industry appears to have a lock on mergers and acquisitions, always looking for ways to increase the value of investments in stocks while skimming off profits for themselves, the technology industry is taking another path. And it is introducing a dose of common sense. Google’s Larry Page calls it the “Toothbrush Test.” In contemplating an acquisition, he asks: “Is it something you will use once or twice a day, and does it make your life better?”
Maybe it is because technology companies have confidence in their analytic skills and capacity to innovate, maybe it is because they are not intimidated by banks, maybe they just believe in the simple idea that value comes from things that work, from function, not perception, but, whatever, they are growing without the financial industry. “Mr. Page is looking for usefulness above profitability, and long-term potential over near-term financial gain,” reported the Times.
This is a refreshing idea in an age of “investor capitalism.” They are hiring their own financial analysts as needed, doing their own due diligence, finding their own partners. In the process, they are avoiding many of the pressures from intermediaries to make the deal work, as well as the risks of insider trading and manipulated prices that have been hallmarks of the financial industry.
“Amin Zoufonoun, Facebook’s vice president for corporate development, said some bankers would come in and pitch acquisition candidates…[But] instead of trying to swallow already established Internet brands, Facebook uses acquisitions to make big bets on the future and plug technical holes.
When “big tech companies are looking to grow through acquisitions, it is the culture and vision, not the earnings and revenue, that are of paramount importance.” They are not looking to slash payrolls, break up functioning entities or plunder assets.
And it’s often cheaper. the Times noted “Cisco, which has acquired more than 170 companies, decided it was more efficient — and more economical — to hire its own full-time bankers rather than pay millions of dollars in fees each time it struck a deal.”
As a result of all these factors, “Deals with unadvised buyers are increasing rapidly. The acquiring company did not use an investment bank in 69 percent of American technology acquisitions worth more than 100 million dollars this year, according to Dealogic. That number was 27 percent 10 years ago.”
News travels fast in Silicon Valley. Many people in technology start-ups know each other. It’s a smaller world. And, to be sure, many newcomers start companies with the goal of being bought out. But it seems that the truly important thing at the top is that the industry wants to grow and become more effective and powerful – not just make a buck.