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Acquisitions to Gain Product Capability

There are three primary reasons to make an acquisition. First, the acquirer may use the acquisition to reduce its cost by consolidating and reducing the total cost of overlapping cost functions. Second, the acquirer may seek to gain a new set of customers. And, third, the acquirer may be seeking a product capability which it does not have. In general, we believe that a successful acquisition will meet at least two out of these three criteria.

Recently, both Apple and Google have made important acquisitions. (See “Audio Tip #104: Where is the “Profit” in Expansion?” on StrategyStreet.com.) Both of these acquisitions have the bonus of acquiring a product capability that the company needs. Google acquired AdMob, a company which places ads on mobile web sites and applications. This is a very fast-growing market. Apple, shortly afterwards, followed suit by acquiring Quattro Wireless, a smaller competitor of AdMob. Google needs this acquisition in order to extend its advertising expertise into the mobile market. Apple needs its acquisition in order to make some revenues on the many free apps that run on its iPhones.

Which of the two companies is likely to be more successful in its acquisition? (See “Audio Tip #200: Using Acquisitions to Create Economies of Scale” on StrategyStreet.com.) Apple should certainly be able to generate revenue relatively quickly because there are so many free apps already out for the iPhone, which run on an advertising business model where the app is free to the consumer. On the other hand, Apple’s culture is hardware oriented. The company may have difficulties in dealing in a largely service-oriented market.

That won’t be Google’s problem. It already lives in the advertising world. In addition, AdMob is a much larger company than is Quattro. Google is likely to have acquired a new product capability with a lower cost structure than its Apple/Quattro Wireless competitor.

Posted 1/25/10

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