I was quite interested in a recent article by Dan Gallagher in the Wall Street Journal. The article outlines how companies that had acquired business in an effort to achieve scale are now shedding those businesses to focus on core competencies. In the story, Gallagher talks about software giants divesting of businesses that they had spent billions to acquire. For example, HP had acquired EDS for $13.9 billion but is now merging its service business with Computer Sciences Corp, thereby exiting the business it paid dearly to enter.
Then there’s Microsoft. It recently announced it was laying off more than 1,800 people from its smartphone division as a result of shuttering Nokia, a company that Microsoft paid $7 billion to acquire. I found this particularly interesting as I had recently talked about Microsoft’s then CEO Steve Ballmer ridiculing Apple’s mobile market entry with the iPhone (check out my Throwback Thursday post on LinkedIn here. Microsoft didn’t see Apple as any threat back in 2007, yet just a few y
ears later, they spend $7 billion to acquire Nokia. That acquisition was a specific (and supposedly strategic) reaction to Apple’s amazing growth in the smartphone market, but it seems to me that the path from ridiculing an up and coming competitor, then acquiring a company to chase said competitor, then realizing that it is not as agile or able to convert that acquisition into market share, then jettisoning said business and taking a write-down.
I am no financial genius, but separate from accounting gimmicks, you can’t just throw away $7 billion and it not have a negative impact. Even if the actual money loss is a non-factor, consider this: whatever time and energy was spent working on the Nokia deal could have been spent on advancing other aspects of Microsoft’s business. That is called “opportunity cost” and it doesn’t show up on the income and expense statement. But it’s real. As I wrote in my book Grounded, you need to carefully consider not just the good things that can occur with a strategic action but also all of the negative things that could occur. Only with a complete understanding of the full spectrum of outcomes can a strategic decision be made that has its best chance for success.
Microsoft is a great company and the Nokia divestiture will be a minor blip for them. But your company may not have that luxury, so carefully and strategically plan acquisitions and growth with eyes wide open.