U.S. corporate treasuries are stuffed with a record amount of cash these days. In fact, the companies that make up the S&P 500 have $1.1 trillion of cash on their balance sheets. The standard explanation for this hoarding of cash is that corporate CEOs are extremely uncertain about the future, given the gridlock in Washington and the downgrade of U.S. debt. Spending money now to develop their companies, they argue, is just too risky.
If that were true, why are the big boys with the biggest piles of cash so willing to part with it when they get locked in on a juicy acquisition target? This week’s stunning offer by Google to buy Motorola Mobility for $12.5 billion is a case in point. Is that not a risky move?
Google says no. “Motorola Mobility’s total commitment to Android has created a natural fit for our two companies,” says Larry Page, CEO of Google. “Together we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers.” The acquisition, Google says, will also give it ownership and control of Motorola’s mobile phone patents, thereby preventing them from being auctioned off to competitors like Apple.
These reasons are less than compelling, particularly in light of the inherent risks of such a massive investment being made outside Google’s traditional field. Google’s “ecosystem” is essentially advertising-based media. The company makes most of its money by providing content in the form of excellent search results on the web and by charging advertisers to run promotional messages and links near those results. I have an Android phone, and its single best feature is that little search icon in the lower right that I tap to make an instant Google search. Android has a number of other features that nicely incorporate Google’s core capabilities.
But Google didn’t make my smartphone, and it doesn’t need to buy a maker of smartphones to continue spreading Google technology in the smartphone market. What it needs to do is build on its traditional media strengths of linking people intelligently to web content and to other web users. What Google does best is facilitate, and marvelously so, our navigation of the web.
It is not a consumer electronics manufacturer, as, for example, Apple is. For all of the legions of enthusiasts of Apple’s operating software, Apple’s strength is designing and marketing innovative and sleek devices that compute and communicate. While it once had better operating software than Microsoft for personal computers, it was murdered in that market by the colossus of Redmond, which focused only licensing its operating software to PC makers, while Apple restricted its software to Apple-built machines. Only when Apple decided it was primarily a good inventor of computer devices—like the iPod, iPhone and iPad—did its market value catch up to and exceed that of Microsoft.
There’s a long list of big companies that made seemingly sensible but ultimately disastrous acquisitions when they strayed from their cores. Sears was still the world’s largest retailer when it bought Dean Witter and later entered the credit card business with Discover. When it started thinking of itself as a financial service company, its retail business suffered. The result is that Sears is now a mere speck in Wal-Mart’s rear view.
Of course, the classic example of is this folly is Time Warner’s merger with AOL. The news and entertainment giant naively thought AOL would give it access to a massive audience on the Internet, a new market it knew little about. If only Time Warner had known that what AOL really had was a “network” of dial-up users and a weak content model, it would have passed on an acquisition that nearly killed it. Rupert Murdoch was quoted in Business Week that Time Warner executives "gave away their company for a mess of porridge.” Oh, but when Murdoch made his entry into the Internet market, he too fell victim to the risks of acquiring a major stake in an unknown field. His costly acquisition of MySpace was hailed as “brilliant” by the analysts at the time. But when he recently unloaded the social network for one-tenth what he paid for it—losing a half billion dollars in the process—he was proven fallible after all.
The lesson? When companies get big and flush with wads of cash, they think of making quick, “risk-free” profits on mega deals, rather than doing the more tedious work of investing in the organic development of their core businesses—the things they’re good at—to make them bigger and better.