Target Selection and Evaluation Practices in Innovation-Driven Big Tech M&As: Case Studies from Google and IBM

Master’s Thesis 1 Target Selection and Evaluation Practices in Innovation-Driven Big Tech M&As Case Studies from Google and IBM Master’s Thesis Nevena Isic University of Jyväskylä April, 2024 Master’s Thesis 2 Faculty: Economics and Business Administration Department: International Business and Entrepreneurship Author: Nevena Isic Title: Target Selection and Evaluation Practices in Innovation-Driven Big Tech M&As: Case Studies from Google and IBM Subject: Strategy Level: Master’s Month and year: April, 2024 Number of pages: 113 Abstract: This research investigated the target selection and evaluation practices of Big Tech companies for M&A in the context of acquiring innovation. Using Eisenhardt’s case study method, the case studies of Google's acquisition of Motorola and IBM's acquisition of Red Hat were analyzed and compared through two key perspectives – overall corporate and specific strategic perspective. The study combined primary data collected through semistructured interviews with M&A specialists from Google and IBM and publicly available secondary data. The study found that for successful target selection, in the early-stage evaluation, an acquirer needs to consider balancing proactive and reactive strategies, evaluate the target from overall corporate and specific strategic perspectives, and balance an outward-looking approach to identifying high-value targets with an inward-looking assessment of specific internal business needs to efficiently mitigate risks. By employing these practices, acquirers are likely to increase their chances of making successful M&A decisions that contribute to long-term value creation. Keywords: M&A, target selection, target evaluation, innovation, big tech Depository: University of Jyväskylä Additional information: AI tools were used in this study for text proofreading and refinement, aiming to enhance the quality and appearance of the content. Master’s Thesis 3 1 Introduction 5 2 Theoretic background 10 2.1 Mergers and acquisitions 10 2.1.1 Definitions 11 2.1.2 Types of M&A 13 2.1.3 Theories behind M&A motives 16 2.1.4 Due diligence 22 2.1.5 Target selection and initial evaluation 25 2.1.5.1 Target company selection 25 2.1.5.2 Evaluation frameworks 27 2.2 Innovation 28 2.2.1 Types of Innovation 29 2.2.2 Technological innovation 32 2.5 Innovation through M&As in the tech industry with a focus on Big Tech 36 2.5.1 What is Big Tech? 36 2.5.2 The beginnings 37 2.5.3 Reasons and motivations 38 2.5.4 The impact of M&As on the acquirer’s innovation performance 39 2.5.5 Risks and challenges 42 2.6 Theoretical framework 44 3 Methodology 47 3.1 The Case Study approach 47 3.2 Data description and collection methods 50 3.3 Data analysis process 53 4 Case studies 56 4.1 The companies 56 4.1.1 The acquirers 56 4.1.1.1 Google 56 4.1.1.2 IBM 58 4.1.2 The targets 60 4.1.2.1 Motorola 60 4.1.2.2 Red Hat 61 4.2 Google’s acquisition of Motorola 62 4.3 IBM’s acquisition of Red Hat 65 Master’s Thesis 4 5 Analysis 68 5.1 Within case analysis 68 5.1.1 Google’s acquisition of Motorola 68 5.1.1.1 Overall corporate perspective 68 Motivations and goals 68 Risks 71 5.1.1.2 Specific strategic perspective 74 Innovation 74 Preliminary due diligence procedures 78 5.1.2 IBM’s acquisition of Red Hat 83 5.1.2.1 Overall corporate perspective 83 Motivations and goals 83 Risks 85 5.1.2.2 Specific strategic perspective 87 Innovation 87 Preliminary due diligence procedures 89 5.2 Cross-case analysis 94 5.2.1 Overall corporate perspective 94 Motivation goals 94 Risks 96 5.2.2 Specific strategic perspective 97 Innovation 97 Preliminary due diligence 99 5.2.3 Key findings 101 6 Discussion 105 6.1 Balancing proactive and reactive strategies 106 6.2 Evaluation from overall corporate and specific strategic perspectives 107 6.3 Balancing an outward and inward approaches 109 7 Conclusion 112 7.1 Managerial implications 112 7.2 Limitations and future research 113 References: 114 APPENDIX 131 Appendix 1. Interview questions 131 Master’s Thesis 5 1 Introduction Innovation plays a crucial role in the survival and growth of organizations, especially in the context of Big Tech companies who have become the epitome of innovation (Ip, 2023). PDMA glossary provides a definition that describes innovation as “A new idea, method, or device. The act of creating a new product or process. The act includes invention as well as the work required to bring an idea or concept into final form” (PDMA Glossary, 2023). Big Tech, also known as the Tech Giants, is a term used to refer to the biggest and most powerful companies in the IT industry, such as Meta (formerly Facebook), Apple, Google, Microsoft, and Amazon (Academic Accelerator, 2023). While these five companies have commonly been synonymous with Big Tech, the term is not exclusive to them, and it is used more broadly, referring also to other technology companies that dominate the industry in their respective fields. (Academic Accelerator, 2023; Emeritus, 2023) Within this sector, mergers and acquisitions (M&A) have emerged as a prominent strategy to foster innovation, leverage synergies, and harness the transformative potential of emerging technologies (Rossi et al., 2012). As defined by Grau and Wallisch (2020, p. 75), M&A is “activity of purchasing or combining companies”. It is hard to imagine today's world without technology, which is defined as “the application of scientific inventions for the practical improvement of human life” (Britannica, 2023). Since technology serves as the foundation for the majority of functions in the modern world and relies on innovation, companies across all sectors recognized long ago that to keep pace with ever-evolving market needs and demands, and to remain relevant to their consumers, they must embrace a continuous process of innovation (Janjic & Radjenovic, 2019). This entails implementing digital transformation and relying on data-driven decisions, being adaptable and responsive to market Master’s Thesis 6 behavior, and making necessary adjustments to business structures and procedures (Verhoef et al., 2021). The Big Tech companies particularly, have introduced inventions that have revolutionized the world that we know today (Ezrachi & Stucke, 2022). The significance of technological innovation in creating competitive advantage for companies, the overall value for consumers, society and shareholders has led to its integration as a crucial element in corporate strategies (Dhingra et al., 2018). While the approach to technological innovation varies from company to company, sometimes occurring spontaneously and other times being deliberately planned, one goal remains common, and it is to effectively manage it in order to maximize growth and profitability. Choosing the right strategies for the maintenance of technological innovation is of great importance because these strategies are significantly different from the management of other business aspects as it requires continuous testing and development of new theories and concepts. (Dogan, 2017) Big Tech companies have profoundly influenced our daily routines, shaping the way we communicate, work, travel, shop, and even think. Their presence can be felt in almost every aspect of our lives. But how did these companies become so big that the magnitude of their impact is felt so strongly? They simply didn’t do it all by themselves (Cabral, 2023). Throughout the years, they have strategically acquired numerous innovative businesses, propelling them to become some of the most powerful companies in our time (Glick & Ruetschlin, 2019). Observing the trajectory of these tech giants reveals a unique pattern in their expansion strategies. Initially, they all made a strong entrance into the market by introducing something truly groundbreaking. Google revolutionized information access with its Search engine, Amazon popularized online shopping and catalyzed the growth of e-commerce, and Apple redefined communication technology with the emergence of the iPhone (Alcantra et al., 2023). Master’s Thesis 7 Despite rapidly achieving success and popularity, these companies recognized that sustaining a viable business and ensuring long-term success required a carefully designed strategy focused on the future. They understood the importance of ongoing innovation to maintain revenue streams and outpace competitors. However, keeping up with innovation and market trends requires resources, research, and expertise often beyond their immediate reach (Roberts, 1988; Dezi et al., 2018). Consequently, they tapped into the vast potential of M&As, enabling them to achieve exponential growth (Dezi et al., 2018). At the same time, the challenging process of selecting and evaluating target companies to find the right fit becomes particularly pronounced in innovation-driven M&As. Determining whether a target company is truly innovative can be difficult, as many companies may exaggerate their capabilities or overestimate their market potential. Another significant challenge arises from the lack of transparency and communication between acquirers and targets. (Celik et al., 2022) Celik et al. (2022) found that acquirers' due diligence captures only 30% of the private information held by targets, and addressing these information frictions can boost M&A gains by 59%, making it a topic well worth researching. The existing literature has primarily focused on operational factors in M&A, such as financial, legal, and cultural considerations, which are integral to the regular due diligence process once target selection and initial evaluations have been completed (Chelimsky, 1994; Jackson, 2001; Hassan, 2014). However, there is limited information on how companies execute target selection and evaluation from a strategic perspective, especially in the early stages. Given their substantial size, market influence, and involvement in M&A activities, exploring the approach of Big Tech companies becomes significant for both practitioners and scholars. Therefore, this research aims to delve into understanding the target selection and early-stage evaluation processes employed by Big Tech companies, particularly in the context of acquiring innovation. The core question the study Master’s Thesis 8 aims to answer is how Big Tech companies select and initially evaluate M&A targets to foster innovation and sustain market dominance. For this purpose, Eisenhardt’s case study method was used to analyze and compare two case studies: Google’s acquisition of Motorola and IBM’s acquisition of Red Hat. As defined by Eisenhardt (1989, p. 534), “the case study is a research strategy that focuses on understanding the dynamics present within single settings”. The data was collected through interviews with M&A experts from Google and IBM as the primary source and publicly available secondary sources. By incorporating both primary and secondary data, this approach allows for building a foundational understanding of the cases using secondary data and then delving deeper by incorporating insights from specialists directly working at the acquiring companies, who are familiar with their strategies and processes. The framework introduced by Park et al. (2013) was used to analyze specific aspects within the cases because it facilitates the selection and assessment of target companies in the context of M&A, with a focus on acquiring technological innovation. The framework specifically enables the identification of target companies closely aligned with the strategic goals of the M&A for enhancing technological capabilities. By considering both the overall corporate perspective and specific strategic perspectives, the proposed method aims to yield more robust and meaningful results compared to single-perspective approaches. The framework's efficiency was demonstrated through an empirical study using patent data related to flexible display technology (Park et al., 2013). Following the framework, the cases were analyzed from two perspectives: overall corporate and specific strategic perspectives. The overall corporate perspective allows for uncovering the overall acquisition strategies of the acquirers. The focus is on understanding the motivations that preceded the acquisitions and shedding light on the associated risks, as well as whether effective risk Master’s Thesis 9 mitigation strategies were employed and how. Analyzing the selection and evaluation process from the specific strategic perspective offers insights into the specific types of innovation and desired outcomes sought by the acquirers. It also delves into the preliminary due diligence process, specifically focusing on the dimensions against which the targets were selected and the practices that the acquirers implemented in this regard. Master’s Thesis 16 2.1.3 Theories behind M&A motives Several authors have emphasized the importance of determining motives and objectives behind M&As in the target selection process (Agrawal et al., 1992; Magenheim & Mueller, 1988). This helps in understanding the factors contributing to the success or failure of target company selection and, more broadly, M&A outcomes (Seth et al., 2002). This section, therefore, presents existing theories that explain the reasons why companies decide to engage in M&A as a strategic solution. Reasons and motives behind M&A endeavors have been extensively discussed by different authors, but no single theory comprehensively explains all M&A endeavors. However, achieving synergies emerged as one of the main reasons (Porter, 1985). Synergy is a term used to explain the ability of companies to benefit more from joining forces with other companies than working independently (Carpenter & Sanders, 2007). Other common motives include market trends and demands. Nguyen et al. (2012) conducted research, examining a sample of 3,520 acquisitions in the United States, and found that the most common motives are related to market timing, signifying changes in the market. Among the numerous explanations found in the existing literature, Piesse et al. (2012) consolidated eight theories behind the most common motives driving M&A initiatives, which are explained in this section. 1. Efficiency theory Efficiency theory in the context of M&As, is about optimizing resource allocation and achieving common goals. The focus here is on creating synergies through combining and coordinating strengths while eliminating redundancies (Berkovitch & Narayanan, 1993; Ross et al., 2002). This theory discusses differential efficiency and inefficiency management theories as two approaches to understanding M&As’ motives (Piesse et al., 2012). The differential efficiency Master’s Thesis 17 theory applies to horizontal M&As, suggests that a more efficient company can improve the efficiency of another. In other words, a stronger company can help a weaker one become more effective. The inefficiency management theory is more common among conglomerates (unrelated industries) and proposes that if public knowledge reveals inefficiencies in a target company, any controlling group from different industries can use M&A to enhance its efficiency. The term 'controlling group' in this context refers to a group of entities, or shareholders that have significant influence or control over a target company, for example, through owning a substantial portion of the company's shares, having voting power, or holding key positions in the company's management. (Copeland and Weston, 1988) 2. Agency theory Jensen and Meckling (1976) introduced agency theory, focusing on the conflict of interests between company owners (principals) and managers (agents) in M&A situations. The theory addresses the challenge of "moral hazard" in monitoring management efficiency due to the separation of ownership and control within organizations. One solution to this involves aligning management's interests with shareholders through contractual commitments and incentive schemes. Compensation plans tied to long-term performance can encourage managers to maximize the firm's market value, as evidenced by positive stock market reactions to takeover announcements by firms with such plans. However, effective management supervision is costly and challenging due to managers' specialized knowledge and potential manipulation of information. (Jensen & Meckling, 1976) M&As can be a solution to inefficient management, but they also pose agency problems. Overoptimistic evaluations by acquirer management may lead to higher bid premiums, motivating managers to prioritize company expansion at the expense of shareholders. However, efficient Master’s Thesis 18 markets can distinguish between good and bad M&As, making M&A activity a mechanism for addressing managerial inefficiency (Jensen & Meckling, 1976). 3. Free Cash Flow The free cash flow theory, linked to agency theory, involves excess cash not needed for profitable projects. Management may withhold it to maintain control and use it for M&As aligning with remuneration schemes benefiting their personal interests (Jensen, 1987; Rozeff, 1982). Retaining free cash flow enables investment flexibility but risks inefficiency (Mann & Sicherman, 1991) and makes monitoring managers difficult, as indicated in agency theory (Jensen, 1987). Therefore, holding onto free cash flow for an extended period may not be optimal. Companies with substantial free cash flow are attractive targets for M&As, as acquiring companies prefer targets with strong cash positions to minimize the financial burden of debt. This means management may choose to use up free cash flow for M&A transactions rather than keeping it within the company (Jensen, 1986). The concern is that management decisions may not always be in the best interest of shareholders, and conflicts of interest may lead to suboptimal allocation of resources and decisions that benefit management more than the shareholders. Strategies, such as empowering outside directors or market forces through M&As can help mitigate these agency problems. (Gibbs, 1993; Jensen, 1987). 4. Market Power Market power refers to a company's ability to control aspects like product quality, pricing, and supply due to its scale of operations. M&As are seen as a strategy for companies to expand their control and influence over a broader geographical area, thus increasing their market power. This Master’s Thesis 19 theory explains both horizontal and vertical M&As, which aim to achieve higher profits and remove barriers to entry. (Leigh and North, 1978; Stigler 1950) During the 1960s, there was a significant increase in industrial concentration and horizontal M&As, driven by the pursuit of market power (Hart & Clarke, 1980). In the 1980s, many countries introduced antitrust laws to prevent too much power in one place and keep competition healthy. These laws were meant to stop big companies from working together to control the market and use resources unfairly. However, even with these laws, there were still a lot of cases where companies broke the rules. This made authorities carefully look at M&As that might harm competition. Antitrust authorities also scrutinize vertical and conglomerate takeovers, as a company's ability to control prices might not just depend on its size in one market but also on its overall size and financial strength. (Utton, 1982) 5. Diversification The diversification theory explains conglomerate takeovers, which involve companies expanding into different industries to reduce risk and stabilize income (Stallworthy & Kharbanda, 1988). For example, in the UK, a significant number of takeovers between 1949 and 1973 involved conglomerates in the manufacturing and distribution sectors. Conglomerate takeovers have since become a common strategy for corporate growth. (Weston and Brigham, 1990) The coinsurance hypothesis, proposed by Lewellen (1971), provides a theoretical basis for corporate diversification. It suggests that the value of a conglomerate is greater than the sum of its individual firms due to decreased risk and increased debt capacity. Diversification lowers the likelihood of corporate failure, making it easier for conglomerates to raise funds and increase market value. Moreover, corporate diversification enhances a firm's competitive ability. Large, Master’s Thesis 20 diversified firms can use their financial and operational competence to deter rivals through tactics like predatory pricing and cross subsidization, creating barriers to entry and driving smaller competitors out of the market. (Lewellen, 1971) However, game theory models (McCardle & Viswanathan, 1994) suggest that corporate diversification may not always increase market value for the company involved in M&A transaction, which contradicts the coinsurance hypothesis and weakens the argument that diversification is a motive for M&A. Overall, conglomerate M&A aim to reduce risk, stabilize income, and enhance competitive advantage, but their impact on market value is subject to further analysis and may not always be favorable. 6. Information The information theory suggests that when companies make specific financial decisions or announcements, they are trying to share new information that not everyone knows yet (Jensen & Ruback, 1983). If the markets are working efficiently, this information can cause a change in the company's value. This same idea applies to mergers and acquisitions (M&A). When companies talk about merging or acquiring each other, the information they share can make the market see their stocks differently and give them more value, especially if they were undervalued before. (Jensen & Ruback, 1983) According to Bradley et al. (1983), the information theory comes in two forms: the "kick-in-the- pants", where share prices change because the buyer’s management accepts higher-valued offer, and the "sitting-on-a-gold-mine", suggesting buyer’s management has valuable information about the seller, which justifies higher price. Both imply undisclosed information favoring the transaction. However, this theory relies on market efficiency and doesn't account for management manipulating share prices for personal gain (Ross, 1977). Master’s Thesis 21 7. Bankruptcy avoidance The early economic literature did not pay much attention to bankruptcy avoidance as a motive for M&A due to the fact that it rarely occurred. However, some researchers suggest a potential link between M&A and bankruptcy (Altman, 1971). For some companies M&As are a strategic move to avoid bankruptcy (Shrieves & Stevens, 1979). On the other hand, financially unhealthy companies may not seem attractive to potential acquirers, but there are a few perspectives to consider in this regard. Acquirers see advantages in distressed targets, such as discounted prices, less competition, and potential synergies. For target shareholders, M&A is preferred over bankruptcy, since in this case they at least receive stock, which is better than ending up with nothing. However, the agency problem should be considered, as managers of distressed firms may reject buyers’ offers to retain control. (Walker, 1992) 8. Accounting and Tax Rates Tax rates can be a reason behind M&As. A company with a high tax rate may acquire an unsuccessful company to lower its overall tax payment. (Copeland and Weston, 1988) This extends to cross-border M&As, where companies registered in low-tax countries can benefit from reduced tax liability when transferring assets. The globalization of business has increased the opportunity for such transactions, which not only involves tax considerations but also have long-term strategic implications. (Ross et al., 2002) There are two methods that are used in this regard, and they are pooling of interests and purchase arrangements. In pooling, the financial statements of merging firms are simply combined, while in an acquisition, the acquiring company adds the assets of the acquired company to its balance sheet, including goodwill. (Copeland and Weston, 1988) Goodwill represents the difference between the Master’s Thesis 22 purchase price and the book value of the acquired company's assets and is amortized over a period of up to 40 years (Hargave, 2023). These accounting treatments have shown different effects on post-M&A performance. The pooling method results in greater reported earnings and lower net assets, while the purchase method has the opposite effect. (Robinson & Shane, 1990) The pooling method was prohibited in the United States in 2001 (Moehrle, 2001) and therefore accounting is eliminated as a reason for the M&As in the United States. 2.1.4 Due diligence Despite being perceived as opportunities for companies to grow and enhance their overall synergies, research has consistently shown that M&A transactions often fail to achieve their intended objectives (Cartwright & Cooper, 1995; Krug and Aguilera, 2005; Paumen, 2023). Simultaneously, multiple studies have highlighted that adequate target selection and initial evaluation are critical determinants for M&A success, both of which are integral steps in the preliminary phase of due diligence (Savovic & Pokrajcic, 2013; Angwin, 2020). Therefore, this section presents the definition and principles of due diligence. Arslan (2009) defined due diligence as a thorough investigative process involving the collection and analysis of data prior to decision-making. This process involves gathering and evaluating data to make informed decisions, understanding the potential risks, benefits, strengths, and weaknesses associated with an asset or a company. Internal teams and external consultants play a crucial role in providing insights into the asset's strengths, weaknesses, strategic value, and competitive positioning within the industry (Angwin, 2001). Weiner (2010) describes due diligence as a Master’s Thesis 23 proactive activity, surpassing traditional audits. Its objective is to assess the latest data to mitigate risks and optimize value for investors engaged in M&A activities. Patel (2018) further explains that due diligence extends beyond the realm of auditing, focusing primarily on accounting and legal compliance. He emphasizes the high importance of meticulous and comprehensive examination during the process, involving other factors such as company culture, corporate strategies, technology, skills, etc. Wangerin (2012; 2016) contributes an alternate definition, referring to due diligence as an investigative process undertaken by the buyers to determine whether acquiring a target company or an asset is viable. It also entails employing specific methodologies to ensure the acquisition value. According to Snow (2011), due diligence fosters confidence among buyers, driving them towards successful transactional outcomes. Furthermore, due diligence serves the purpose of eliminating misinterpretations and ensuring that the acquisition value proposed by the seller aligns with fair market standards (Mikesell & Wood, 2016; Shahatha et al., 2021). Overall, all authors agree that the due diligence stage holds significant importance within the M&A process, as it empowers the acquiring company to effectively manage associated risks and accomplish the acquisition objectives. Savovic & Pokrajcic (2013) suggest that the best time to start the due diligence process is before the transaction preparation phase, as it allows for the utilization of publicly accessible information. They further define three main stages of due diligence, of which the first stage is relevant to the scope of this research: (a) preliminary due diligence, (b) due diligence review and (c) transactional due diligence. In the preliminary due diligence phase, the acquiring company carefully selects the target company and conducts a valuation of both the company and the potential advantages of the acquisition. It Master’s Thesis 24 assesses publicly available information related to the target company, involving a thorough review of various data, such as its human resources, culture, intellectual property, financial statements, and other pertinent information—particularly for publicly listed firms. It's worth noting that the insights gained by the acquiring company during this stage are usually not much more profound compared to those available to other market participants who have access to publicly accessible information. (Savovic & Pokrajcic, 2013) After the selection and valuation of the target company in the preliminary phase, the due diligence review begins with the signing of a confidentiality agreement and negotiations. The objective during this stage is to secure and assess confidential information about the target company. This information plays a crucial role in determining whether to proceed with the acquisition and, if so, in negotiating the specific terms of the transaction. The acquiring company, driven by concerns about potential litigation risks, seeks private data from the target company, while the target company is expected to transparently disclose it to reach a mutually beneficial agreement. (Savovic & Pokrajcic, 2013) However, to maximize the purchase price, a target company may sometimes decide to withhold critical information (Celik et al., 2022). In the transactional due diligence phase, the acquiring company continues to collect private information and performs verification procedures to ensure the accuracy of the previously gathered data. Acquisition agreements are structured to support this verification process through statements and guarantees. This phase provides the acquiring company with crucial and precise information, facilitating an assessment of the fair value of the target’s net assets. The transaction phase serves as the last chance for the acquirer to comprehensively evaluate the purchase prior to assuming the risks associated with ownership. Upon the conclusion of transactional due diligence, the company takes ownership and assumes control of the target company. (Savovic & Pokrajcic, 2013) Master’s Thesis 25 2.1.5 Target selection and initial evaluation Scriven (1991) defines evaluation as a trans-discipline involving processes such as collecting, analyzing, and standardizing data as the initial step, followed by the application of values or standards. According to Chelimsky (1997), the main purposes of evaluation are accountability, development, and knowledge functions. Many studies have shown that M&As more often fail than succeed (Christensen et al., 2011; Park et al., 2013; Angwin, 2020). While the reasons for this vary, they often involve misevaluation of the target company (Pereiro, 2015). Therefore, selecting the right target that aligns with the strategic goals of the M&A has been recognized as fundamental in the target evaluation process (Christensen et al., 2011; Kengelbach & Roos, 2011). However, as Kaplan & Weisbach (1992) suggest, identifying the motives for initial strategy formulation precedes target selection. Therefore, while the primary focus in this study remains on the target evaluation during the selection phase, this research also considers the initial strategy formulation stage and its motives, as defined in section 2.1.3, to enhance comprehension of the selection decisions. 2.1.5.1 Target company selection Selecting the right target is crucial in M&As to ensure success. Managers often focus on strategy and integration, but target selection is equally vital. The process involves creating a target profile aligned with the buyer’s strategy, identifying potential targets, and assessing their fit with the profile (Venzin et al., 2018). However, the first step is usually defining M&A objectives and motives (Hassan, 2014). Based on those, in the evaluation phase, various factors are taken into consideration, such as the level of shareholding (Gaughan, 2010), innovation capabilities, cultural fit, geographic location (Chari & Chang, 2009; Dalton et al., 2003), expected restructuring (Faccio Master’s Thesis 32 with the related scientific and engineering knowledge, remains unchanged. (Henderson & Clark, 1990) Radical innovation, according to O’Connor (1998), involves introducing something entirely new in terms of performance or making significant improvements. It is the type of innovation where new technologies are leveraged to target previously untapped consumer segments. Companies that achieve success through radical innovation with a new product or service often first adopt an incremental innovation strategy to continuously enhance their offering and drive increased sales. By combining the power of radical innovation to capture new consumer segments with continuous improvements, companies can establish themselves as industry leaders and drive long-term growth. Radical innovations have the power to transform existing markets and industries and often lead to the creation of entirely new ones. (O’Connor, 1998) At the same time, Radical Innovations require a lot of resources and can be risky, leading to a continuous process of testing, failing and breakthroughs (Rice et al., 1998). 2.2.2 Technological innovation Coccia (2021) suggests that in technology, out of all industries, innovation plays the most crucial role. In order to differentiate from the competition, technological innovation not only looks to improve already existing offerings, but also to revolutionize it. When the new upgrades are released onto the market, they are seen as advancements that will at the same time benefit the company, the consumers, and often society in general. For leaders in the tech industry, such as product managers, developers, engineers, UX designers, embracing innovation is not a choice, it is necessity (Chesbrough, 2010; Wang et al. 2005). Master’s Thesis 33 Schumpeter (1939) was one of the first to propose a theory on technological innovation. According to him technological innovation follows a cyclical pattern, with each innovation following a similar trajectory. Nevertheless, the duration of these trajectories may vary across cycles. Moreover, these cycles do not exist in isolation but instead form an intricate network, wherein one technological breakthrough can exert influence over others. Expanding on this, Abernathy and Utterback (1975) found that the innovation trajectories are jointly shaped by the interplay between the firm and its surrounding environment. This is because different environments have a need for specific capabilities, creating a reciprocal relationship between the two. Technological progress is an evolving process characterized by intermittent leaps. Breakthroughs in products or processes are rare but have a profound impact. These disruptions initiate a period of technological discontinuities, marked by intense competition among alternative product forms. This further leads to a period of technological ferment marked by experimentation. (Tushman & Anderson, 1986) This period persists until a dominant design emerges, consolidating standards within the product class and signaling the end of the tumultuous period. Alternative designs are gradually marginalized, and further development focuses on refining the widely accepted design. Incremental improvements become the driving force behind technological progress once a dominant design is established. This incremental progress arises from the collaboration of multiple organizations, usually motivated by growth and profit. The shift from incremental to transformative change occurs when a major advance disrupts the established order, rendering older technologies obsolete. (Tushman & Anderson, 1990) The periods of technological progress, as described by Tushman & Anderson (1986; 1990) can be more concisely presented through the S-curve theory. First described by Roger (1962) the theory of the S-curve in technological innovation explains that the adoption and growth of a particular Master’s Thesis 34 technology over time follows a pattern resembling the shape of the letter "S." This pattern represents the relationship between the cumulative investment or effort invested in the development of a technology and its corresponding performance improvement or market penetration. The S-curve theory recognizes three distinct phases in the life cycle of a technology: introduction, growth and maturity (Utterback 1978, 1994), as demonstrated in Figure 3. The introduction phase, known as the slow growth phase, is characterized by limited awareness, high costs, and relatively modest performance compared to existing alternatives. During this phase, technology faces numerous challenges and uncertainties, resulting in gradual progress and minimal market impact. As the technology improves and gains momentum, it transitions into the growth phase. In this stage, the technology experiences accelerated adoption and growth as its performance reaches a tipping point, becoming increasingly attractive to a wider market. The technology's growth rate steepens as more users embrace it, leading to exponential increases in market share or performance. Eventually, the technology reaches a saturation phase, marking the third phase of the S-curve, called maturity. At this stage, the technology approaches its maximum potential, and the market becomes saturated with users who have already adopted it. Growth rates start to decline as technology becomes widely accepted and its performance improvement reaches a plateau. Further incremental advancements may yield diminishing returns and fail to generate significant market impact. (Sood & Tellis, 2005) Master’s Thesis 35 Figure 3. Technological development S-curve; Adapted from: Priestley et al. (2019) Tushman & Anderson (1986; 1990) further explain that the significant technological shifts can be categorized as competence-destroying or competence-enhancing, as they have the power to either undermine or boost the capabilities of established companies in an industry. A competencedestroying discontinuity has the ability to either introduce an entirely new product category or replace an existing one. It marks a significant shift in the way a specific product is manufactured. On the other hand, competence-enhancing discontinuities initiate remarkable advancements in price and performance by harnessing the existing knowledge within a product domain. These breakthroughs act as viable alternatives to outdated technologies without considering the capabilities required for mastering the old methods obsolete. These disruptions represent a considerable development in performance compared to preceding products while capitalizing on the foundations of existing expertise. Introduction Growth Maturity Time Master’s Thesis 36 2.5 Innovation through M&As in the tech industry with a focus on Big Tech This section provides a brief literature review concerning innovation through M&As in the tech industry, with a particular focus on Big Tech companies. It will start by explaining the concept of Big Tech and then proceed to discuss what is currently known about innovation-driven tech M&As. To effectively analyze the target company's selection and evaluation procedures, it is necessary to first gain a comprehensive understanding of the broader context. The review examines the underlying motivations behind these M&As, the advantages they confer upon acquirers, and the associated risks and challenges. 2.5.1 What is Big Tech? The term "Big Tech" refers to large technology corporations that have dominated the sector for decades due to their immense size, influence, and remarkable financial success. Arguably, they include some of the world's best known technology names headquartered in the United States, like Amazon, Apple, Facebook (Meta), Google (Alphabet), and Microsoft. However, this list is not exhaustive, and it also refers to other major global players, such as Tencent, Alibaba, IBM, or Tesla. (Birch & Bronson, 2022). They have transformed the world we live in, shaping our interactions, driving economic growth, and influencing the direction of technological progress, with their products and services utilized by billions of users and customers worldwide. They stand as pioneers in the latest groundbreaking technologies such as Artificial Intelligence (AI), cloud computing, 3D printing and the Internet of Things (IoT) (Rosencrance, 2021). Because of this, they have set themselves apart as powerful forces in the global landscape, and their continued innovation promises to further reshape the world Master’s Thesis 37 in the years to come. At the same time, they frequently spark discussions regarding their disproportionate impact on the economy and society at large, as they are known for leveraging vast volumes of data. This often results in increased regulatory scrutiny driven by concerns over their power and influence. (Birch & Bronson, 2022) 2.5.2 The beginnings Using M&As to gain an innovation advantage among competitors has a long-standing history among companies, particularly in the tech industry. Finding sustainable ways to innovate in big corporations is a complex process that requires a combination of a constant influx of fresh ideas, competence, skills, and resources (Gantumur & Stephan, 2011). This is how the strategy of innovation through M&As was born. As a way to diversify their portfolio, Big Tech companies started funding and acquiring other innovative enterprises and startups, which eventually became a part of a big brand’s name (Alcantara et al., 2021). Since 1990, there has been a significant increase in M&A activity within the high-tech industries. Initially they revolved around the acquisitions of small companies and startups. (Rossi & Tarba, 2013) For example, in 2000 IBM introduced Emerging Business Opportunities (EBOs), a management program intended to find, support, and fund high-potential startups. Within this program, IBM first incubated seven startups, and soon after that over twenty, while integrating their products and innovations into its own portfolio. The outcomes of this initiative were impressive as the EBOs generated significantly higher revenues than the company's entire portfolio before that. (Binns et al., 2022) While at the time the target companies often used to be underfunded, small Master’s Thesis 38 companies (Benou & Madura, 2005), nowadays they also involve well established firms of all sizes (Alcantara et al., 2021). Big Tech companies often buy competitors or companies that represent a potential threat in some way (Rinehart, 2023), indicating that besides innovating, the purpose is often to boost profitability and market share. In 2021 tech giants like Apple, Meta (Facebook), Google, Amazon, and Microsoft went on a buying spree after the White House regulators and members of Congress accused them of restricting competition and harming consumers. They bought up smaller competitors at a record rate, which resulted in a huge number of acquisitions. The Financial Times analysis of Refinitiv data showed that since the beginning of 2021, IT giants have spent at least $264 billion on potential competitors with a value of less than $1 billion, breaking the previous record set in 2000 during the “dotcom boom”. (Stacey et al., 2021) “Dotcom boom”, also known as “dotcom bubble” is a name used for the late 1990s investments in Internet-based companies, which led to a rapid increase in the valuations of U.S. technology stock shares (Hayes, 2019). 2.5.3 Reasons and motivations The primary motivation driving M&As in Big Tech has been gaining access to fresh ideas, expertise, technical know-how, and advanced technologies, which is expected to persist as a longlasting and important aspect of corporate innovation strategies (Rossi & Tarba, 2013). Similarly, Chaudhuri (2004) observed in his research that in acquisitions focused on innovation, such as Big Tech, the primary goal of the acquiring company is typically to obtain patents and innovative products. These products may already be finalized and ready for market, or they could still be in the developmental stage. Another common motive is gaining access to new technologies and Master’s Thesis 39 associated knowledge that can be utilized for designing and launching new products. Regardless, the objective is generally long-term and involves financial, market, and competency advantages. In their study, Puranam & Srikanth (2007) investigated how acquirer companies utilize technology acquisitions. They discovered two distinct ways in which acquirers benefit from these acquisitions. The first approach involves acquirers leveraging the acquired company's knowledge to enhance their own innovation processes, in other words using what the acquired company “knows”. Essentially, they tap into the existing knowledge of the acquired company. The second approach occurs when acquirers rely on the acquired company to independently provide ongoing innovation, utilizing what the acquired company actively “does”. The researchers further argue that post-merger integration plays a crucial role in enabling acquirers to capitalize on the acquired company's knowledge. This integration process facilitates coordination between the acquirer and the target. However, there is a challenge in harnessing what the target actively does due to disruptions caused by reduced autonomy within the acquired organization. 2.5.4 The impact of M&As on the acquirer’s innovation performance Hagedoorn and Duyisters (2000) conducted research in the high-tech sector to investigate the impact of acquisitions on companies' technological performance, as reflected by the number of patents. They suggest that the complexity of technological advancements surpasses the capabilities of most individual firms. Consequently, the firms need to rely on external sources for innovative ideas and expertise, making strategic alliances appear as a potential solution to this challenge. In this context, improved performance implies that integration through M&As should support continuous enhancements in new technological competencies, given the environment's emphasis Master’s Thesis 40 on intensive R&D activities. Thus, they hypothesized that successful M&As would provide the acquiring company with ongoing learning and development opportunities, ultimately elevating its innovation capacity and establishing its position as a market pioneer. Their research revealed that while M&As had a positive effect on product innovation, one of the main challenges was the differences between the participating companies. They further conclude that organizational and strategic compatibility between the entities involved is crucial for M&As to stimulate innovation activity in the long run. Hitt et al. (1996) highlight the significance of international diversification in attaining a competitive advantage, while also emphasizing the complexities associated with its implementation. They examined innovative performance within the context of international diversification of technology M&As and found that acquisitions do not always result in favorable firm performance. The results they got showed that some acquirers experienced challenges on both R&D intensity and patent intensity. As defined in the Eurostat's glossary, R&D intensity represents the percentage of revenue that a company invests in research and development (R&D) activities. It is used as one of the key performance indicators to measure how much a company innovates. Patent intensity refers to a company's level of patent activity, or the extent to which a company engages in the creation and acquisition of patents. It represents the concentration or density of patents held by a company relative to its size or industry. (Eurostat glossary, 2022) Patent intensity can be quantified by various metrics, such as the number of patents granted, patent applications filed, or the ratio of patents to revenue. It serves as an indicator of a company's innovation and intellectual property strength, reflecting its commitment to R&D. (Hu & Png, 2013) Expanding their analysis to the performance evaluation of internationally operating M&As, Hitt et al. (1996) came to the following conclusions: Master’s Thesis 41 ● International diversification through M&As demonstrates a negative correlation with performance in firms lacking diversification, a positive correlation in firms with high product diversification, and a curvilinear relationship in firms with moderate product diversification. In other words, the higher the level of product diversification in a firm, the higher the performance when merging with another firm internationally. ● International diversification through M&As has a positive correlation with R&D intensity, but when combined with product diversification, it leads to negative outcomes. This means that companies which expand internationally through M&As tend to experience improved results in their R&D efforts. However, if the purpose of this international expansion is to diversify their product range, it leads to negative outcomes. Cummings and Teng (2003) argue that the degree of success of the post-merger integration process is dependent on the degree of the knowledge transfer success between acquirer and an acquisition. A comprehensive examination across over 15 industries, three distinct governance structures, and involving collaborations between domestic and international R&D partners revealed factors associated with successful knowledge transfer. These factors include: ● Adequate comprehension of the R&D units where the desired knowledge originates, within the source entity. ● The degree to which the involved parties possess similar knowledge foundations. ● The level of interaction between the source and the recipient, facilitating knowledge transfer and engaging in an articulation process that enables accessibility of the source's knowledge by the recipient. Master’s Thesis 48 where the boundaries between the phenomenon and its context are not clearly defined, employing multiple sources of evidence to gain comprehensive insights. Ultimately, each case represents independent research that can be replicated in different contexts. (Yin, 2009) Case studies serve various purposes, such as addressing questions, testing theories, or developing new concepts. Data collection typically employs various methods, including literature reviews, interviews, surveys, and observations. The data can be qualitative, quantitative, or a combination of both. (Eisenhardt, 1989) Although some critics argue that case study research serves primarily as an exploratory tool or a means to formulate hypotheses, and that it lacks scientific rigor (Sekaran & Bougie, 2016), they have been a proven tool for learning from real-life examples (Langley, 1999). Validity, in this context, refers to the degree to which research findings accurately reflect the collected data (internal validity) and can be applied or transferred to different contexts or settings (external validity) (Sekaran & Bougie, 2016), which Langley & Abdallah (2011) identified as the biggest challenge in qualitative research. Qualitative research can be messy, and at times, it is challenging to make sense of the data and categorize it properly to address the research questions. Nevertheless, according to Langley & Abdallah (2011), two methods have stood out as tested and successfully employed templates by researchersthe Eisenhardt method and the Gioia method. The Eisenhardt method is primarily associated with case study research, emphasizing the importance of a clear and predefined research design, involving multiple iterations of data collection and analysis. The Gioia method is known for its application in narrative analysis, and it focuses on capturing and interpreting the stories within the data, often with a more flexible research design compared to the Eisenhardt method. (Langley & Abdallah, 2011) Master’s Thesis 49 Earlier scholars argued that single case studies yield better results (Gouldner, 1954, Lipset, Trow, & Coleman (1956); Dalton (1959); Kanter, 1977). However, more recent scholars generally agree that a multi-case study approach is more efficient and provides more authentic results (Eisenhardt, 1989; Yin, 2009; Eisenhardt and Graebner, 2007). In her study, Eisenhardt (1991) emphasizes that methodological rigor and multiple-case comparison are necessary for gaining insights and building theories from the cases. Eisenhardt (1989) proposes that case analysis should be conducted in two stages which can be done in different ways, and it is up to the researcher how to structure and code the data. In the first stage, each case study is analyzed separately to understand its specificities. The purpose is to thoroughly understand each case individually before attempting to generalize across cases. This stage lays the foundation for facilitating cross-case comparisons in the second stage. The purpose of the second, cross-case analysis stage is to go beyond initial impressions by comparing the within-case findings. It aims to capture new information and develop theories. Eisenhardt (1989) proposed several possible approaches to this, such as identifying common dimensions and comparing the cases against those, looking specifically for similarities and differences across the cases, or dividing and analyzing data based on the data source. Following Eisenhardt’s Method, in this research, each of the two cases are first analyzed separately and then compared to identify common patterns and differences. It starts with an overview of the backgrounds of all the four involved companies and presenting the contexts of the cases in section 4. It continues to examine each case separately and eventually compare outcomes of both cases based on the dimensions outlined in the framework in Table 4, section 2.6 to provide conclusions. Master’s Thesis 50 3.2 Data description and collection methods The study relies on qualitative data collected from primary and secondary sources from November '22 to January '24. Primary data were collected through interviews with M&A specialists from Google and IBM and the secondary data was collected from publicly available sources. An interview is a dialogue aimed at gathering information, involving a researcher posing questions and an interviewee providing answers when the aim of research is to achieve a comprehensive understanding of individuals' opinions, thoughts, experiences, or emotions (Easwaramoorthy & Zarinpoush, 2006). Interviews can be conducted as one-on-one or group conversations to gather information and insights related to a research topic. They can be structured, following a predetermined set of questions, or semi-structured and unstructured, allowing for open-ended discussions to explore complex topics and capture nuanced data (Bhat, 2023). Semi-structured interviews, a method used in this study, is commonly employed in qualitative research. It typically follows a predetermined plan and set of questions, yet it adopts an open form, enabling a researcher to explore and modify it as the conversation with participants unfolds. (Magaldi & Berler, 2018). The interviews in this study were conducted on a one-on-one basis in a semi-structured manner, either face-to-face or via online video calls and their durations ranged from 20 to 60 minutes. The conversations were guided by pre-determined questions that were sent to the participants ahead of the interview but remained flexible. They were also supported by follow-up questions, probes, and comments during the interview. The table with predetermined questions that were sent to the participants ahead of the interview are presented in Appendix 1, along with the additional questions during the interviews. Altogether, 23 specialists participated in the interview, of whom 13 from Google and 10 from IBM. The interviewees' profiles included regional managers responsible for Master’s Thesis 51 tracking megatrends and suggesting innovations, heads and vice presidents of M&A and corporate development departments actively involved in strategy development and M&A execution activities, as well as engineers and technical staff responsible for technology evaluations of the target companies. Their tenure at the company ranged from 4 to 24 years. The selection of participants was based on three criteria: (a) level of involvement and experience in setting and executing the corporate strategies in the context of innovation, (b) level of involvement and experience in selecting and evaluating target companies for M&A, and (c) familiarity with the cases in question. I initially created a pipeline of potential participants, consisting of a total of 45 individuals— 27 from Google and 18 from IBM of whom 23 were ultimately available for the interview. While 5 participants, 3 from Google and 2 from IBM, were directly engaged in the acquisition processes, the majority were not. Consequently, the interview data is generally treated as valuable insights from informed observers rather than firsthand participants. Tables 5 and 6 respectively summarize the profiles of participants from Google and IBM, including their roles, tenure at the company, interview details (length and mode), and whether they were directly involved in the acquisitions or not. While the main focus in this study is on the primary data that delivers a deeper understanding of the cases, the secondary data provides a comprehensive foundation for the primary data analysis. The primary data provides authentic insights from the acquirers' internal perspective, while the secondary data offers an overview of the participating companies' backgrounds, financial health, operating markets, corporate strategies, and relevant industry trends at the time of the acquisitions. It serves a pivotal role in introducing the case studies, presenting essential background information, and contextualizing the events. Most of the secondary data is presented in Section 4, which provides the background of the involved companies and the case studies. Some of it is also included in the Master’s Thesis 52 analysis part in section 5 to supplement the statements from the interviews. Secondary data were collected from various sources such as academic articles, industry reports, annual reports, press releases, newspapers, journals, and the internet in general. A total of 112 secondary sources were reviewed. Google Role Tenure in years Mode of interview (in person/online) Length of interview in min Directly involved in the acquisition (yes/no) Emerging technologies engineer- M&A 5 online 60 no Lead technology analyst - M&A 8 online 45 no Innovation strategist 5 in person 55 no Digital strategy lead 6 in person 30 no APAC regional product lead for Android 11 online 35 no Android product manager for Switzerland 4 online 45 no Director of strategy and M&A- Generative AI 5 online 30 no Vice President, Strategy & M&A integration 7 online 40 no President, Google customer solutions 21 online 30 no Innovation managing director- R&D 17 online 30 no Corporate development director 19 online 25 yes Lead Risk Analyst- M&A 14 online 30 yes Global managing director for Android 16 online 30 yes Table 5. Google interview participants IBM Role Tenure in years Mode of interview (in person/online) Length of interview in min Directly involved in the case (yes/no) Red Hat director for EMEA 13 in person 40 yes Master’s Thesis 53 Vice President, global software businesses 24 online 20 yes Head of strategy for EMEA - cloud consulting 16 in person 45 no Strategic planning and analysis director 20 online 30 no Data and technology innovation director 18 online 30 no Vice President digital development for EMEA 12 in person 45 no General manager- M&A strategy and development 22 online 30 no Innovation architect 7 online 30 no Innovation architect 4 online 30 no Patent analyst- M&A 5 online 30 no Table 6. IBM interview participants 3.3 Data analysis process Following the Eisenhardt method, as presented in section 3.1, I started the analysis process with within-case analysis. Firstly, I identified patterns among the data. Once all data were collected, both primary and secondary, I synthesized and structured it coherently, guided by the analysis framework presented in Table 4, section 2.6. This involved grouping the data according to specific categories in the framework for each case separately. Initially, I divided it into two categories: one falling under the overall corporate perspective category and another under the specific strategic perspective category. I further divided it into subcategories such as motivations and goals, as well as risks, within the overall corporate perspective category, and innovation and preliminary due diligence within the specific strategic perspective category. Eventually, within each category and Master’s Thesis 54 subcategory, I identified the relevant data and structured it into meaningful units that address the research question. I analyzed interview transcripts using the Thematic Analysis (TA) technique, as introduced by Holton (1973). TA is a flexible method for identifying and interpreting patterns of meaning, known as 'themes' within qualitative data. Unlike other qualitative analytic approaches, TA is adaptable to various theoretical frameworks and research paradigms. It is particularly applicable in analyzing interview transcripts because it allows for capturing nuanced data (Clarke & Braun, 2016). Simultaneously, I analyzed the secondary data utilizing a Literature Review (LR) technique by reviewing and identifying relevant insights among various secondary sources, including academic papers, books, industry reports, news articles, and journals. LR is a technique used to critically examine information from publicly available written sources and communicate the findings that have been established on the researched topic (Snyder, 2019). I further triangulated the data from primary and secondary sources, a method introduced by Denzin (1978), which refers to merging data from multiple sources to address a research question. Upon reviewing and categorizing the data, I compared different perspectives and drew connections between the sources. I did this by intertwining primary data findings with relevant secondary insights to gain a comprehensive understanding of events and factors. My goal was to enrich publicly available data with insights from interviews, thus extending beyond existing knowledge. Furthermore, I aimed to identify any gaps or inconsistencies in the information and propose explanations for those. Subsequently, after completing the within-case analysis, I conducted cross-case analysis by comparing the findings from both cases. This involved examining similarities and differences in Master’s Thesis 55 identified practices among the acquiring companies and eventually drawing conclusions. Although I initially examined secondary data to establish a foundational understanding of the cases, as detailed in section 4, my primary focus was on presenting primary data findings collected from interviews. It is important to note also that the semi-structured approach to interviews allowed me to capture intriguing data that extended beyond the questions related to the studied cases but were nonetheless relevant to answering the research question. Recognizing the value of this additional data, which is very much on-topic and complements the research, I included it in the data analysis report as well. Master’s Thesis 56 4 Case studies This section provides an overview of the case companies' backgrounds, both the acquiring and target companies, as well as the contexts of the analyzed cases. 4.1 The companies 4.1.1 The acquirers Google and IBM are two very different companies. They operate in mostly distinct markets, however, in some areas such as cloud computing, they are direct competitors. IBM was a pioneer in hardware production, a legacy it continues to uphold to this day, and it is considerably older compared to Google. On the other hand, Google leads in digital marketing and information access. Despite their differences, both companies share a common strategy of enhancing innovation through M&As. 4.1.1.1 Google Google's story began in 1995 as a research project by two Stanford Ph.D. students, Larry Page and Sergey Brin. Their search engine, initially named "Backrub," aimed to analyze links to determine website importance. It quickly gained traction and was officially launched as Google in 1998 with a mission “to organize the world’s information and make it universally accessible and useful”. (Google website, 2023) Only six years later, in 2004, the company went public with a valuation of $23 billion (The Economic Times, 2023). Master’s Thesis 57 In 2015, Google underwent a significant corporate restructuring, which resulted in forming the conglomerate Alphabet Inc. This was driven by Google's expansive acquisition activity, which diversified into various technological fields beyond its core business of internet search and online advertising. To address shareholder concerns about excessive spending on unrelated acquisitions, Google became a subsidiary of Alphabet, allowing Alphabet to keep its main business while fostering future innovation through subsidiaries like X, CapitalG, and GV. (Yeon, 2018) Today, Alphabet’s subsidiary, Google, is a leading global high-tech company headquartered in Mountain View, California. The search engine remains its strongest product and continues to generate the most revenue (Hall & Hosch, 2023). According to the latest statistics, Google dominates the search engine market with 83% share, while other players in the space, such as Bing, Yahoo, and Baidu, trail far behind (Statista, 2023). In addition to Search, Google now offers a much broader portfolio of products. The second-largest revenue generator is Google Cloud, but the company also provides other products such as Android, Gmail, Maps, etc. In recent years, Google has increased its focus on artificial intelligence and machine learning (Google website, 2023). Since its beginnings, Google has been actively investing in acquisitions to drive innovation and venture into new markets (Wikiwand, 2023). Back in 2003, the company invested $102 million to acquire Applied Semantics, the creator of AdSense, a service that allows website owners to display ads on their web pages. Later, in 2006, Google purchased dMarc Broadcasting, also for $102 million and in the same year invested $1.65 billion in stock in another major acquisition- YouTube. Only a year later, in 2007, Google marked yet another milestone with the acquisition of DoubleClick, a prominent online advertising firm, for a substantial $3.1 billion. (Chowdhry, 2008) Recognizing the tremendous growth in the mobile applications market, the company responded with a strategic move in 2009, acquiring the mobile advertising network AdMob for $750 million. (Hall & Hosch, Master’s Thesis 64 competition by strengthening Google’s patent portfolio, enabling us to better protect Android from anti-competitive threats from Microsoft, Apple, and other companies” (Google Official Blog, 2011). Some also considered the acquisition to be Google's backup plan in case Samsung, one of its major hardware partners, chose to create devices based on a modified version of Android. This scenario would mean that the integration of Google's services on Samsung devices could be prevented. Motorola was viewed as a perfect solution if this were to happen, allowing Google to explore a more integrated software-hardware approach (Efrati, 2012). Eventually, Motorola became unprofitable. Initially, it employed a large workforce, but after the acquisition this number shrunk to approximately only a quarter of its original size. This decline occurred partially due to significant layoffs, as Google laid off about 20% of Motorola employees right after the acquisition. (Efrati, 2012) Despite the launch of two new productsthe Moto X and Moto G, the company continued to lose hundreds of millions of dollars each quarter. (Rushe, 2014) The mobile phone sector was known for having tight profit margins, which meant that phone manufacturers needed to sell a lot of phones to make a profit. In the end, Google decided to offload its subsidiary’s unprofitable business and sold it to Chinese PC maker Lenovo for only $2.9 billion after less than 2 years. This was a huge loss as Google initially paid 12.5 billion for this acquisition. After Lenovo acquired Motorola Mobility, Motorola’s journey saw a mix of innovation, changes in ownership, and efforts to survive in the competitive smartphone market. (Linge, 2016) Despite the loss, some analysts believed that Google also benefited from the acquisition because it retained the patents it purchased and had the opportunity to experiment with building its own hardware, potentially improving its Android products in the long run (Branscombe, 2014). Master’s Thesis 65 4.3 IBM’s acquisition of Red Hat Preceding the Red Hat acquisition, IBM identified data analytics, artificial intelligence (AI), and cloud computing as the primary drivers of its growth (IBM Annual Report 2018; IBM Annual Report 2019). These factors were post-acquisition narrowed down to hybrid cloud and AI (IBM Annual Report, 2021), proving the acquisition was the right choice. However, despite its impressive historical success, when cloud computing emerged as a crucial tool for most businesses today, IBM began to lag behind dominant forces in the market, such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP). The company struggled to keep pace with these major players in the cloud space, making it imperative to find a solution to maintain its market position and continue innovating and expanding (Gall, 2018). As the cloud became a necessity, companies began transitioning, with the majority being at least 20% into the process of migrating to the cloud in 2019. The Covid-19 pandemic additionally accelerated this process, given that the world had gone into full remote working and living mode. Even though the economic recession was about to begin, spending on cloud solutions increased by more than 40% in 2020. Given the new circumstances, digital transformation was a fundamental and urgent need for all organizations. (Deloitte, 2022) The initial phase of this process included starting on the cloud journey, which helped many companies lower costs, increase efficiency, and revive their customer relationships. The next phase included moving all the operations to the cloud, including supply chains, data storage, and core systems in general. Businesses started managing their entire IT infrastructure, both on and off-premises, in the cloud, which was why the demand for hybrid cloud solutions became immense. This stressed the importance of relying on digitization more than ever and represented a huge opportunity for cloud providers. (Murray, 2019) Master’s Thesis 66 IBM and Red Hat were both at turning points, where further expansion required changes and additional sources. IBM had already struggled with revenue declines for several consecutive years (Salinas, 2018), while Red Hat, facing challenges in customer acquisition, recognized IBM's influence and customer base as an opportunity (Miller, 2022). In July 2019, both companies announced that the $34 billion acquisition of Red Hat by IBM was closed (IBM website, 2019; Red Hat website, 2019). This represented the biggest IBM acquisition and deal to date, as well as one of the biggest tech acquisitions ever. Uniting the open hybrid cloud technologies from Red Hat with IBM's excellent sector expertise and sales leadership across more than 175 countries opened new opportunities for both companies. IBM and Red Hat joined forces to collaborate and provide a cutting-edge hybrid multicloud platform based on open-source technologies like Linux and Kubernetes. This service was meant to enable companies to securely deploy, operate, and manage data and applications both on-premises and across various private and public clouds. IBM and Red Hat made this decision on the grounds of speeding up innovation and creating more powerful offerings for their customers while growing and remaining strong in the cloud space. (IBM website, 2019; Feiner, 2019) After the acquisition, Red Hat became the main division of IBM’s Hybrid Cloud, but it continued to operate independently and retained its name (Red Hat website, 2019). In 2020, immediately following the acquisition, Red Hat’s CEO James Whitehurst was elected as IBM’s president, alongside Arvind Krishna as the CEO (IBM website, 2020). However, Whitehurst soon after the election stepped down from the role and eventually resigned from IBM. Some critics suggested he had personal motives behind this, with some even labeling him as 'power-hungry,' as it appeared that he was disappointed not to be elected as IBM’s CEO, a position filled by Krishna, an insider Master’s Thesis 67 at IBM. Whitehurst's personal explanation was that he only intended to stay at IBM long enough to ensure the successful completion of the Red Hat integration. (Vaughan-Nichols, 2021) Despite some analysts calling this transaction a “desperate deal” due to IBM being late in the cloud offerings (Colville, 2018), the acquisition proved to be beneficial for both companies involved. In the fiscal year 2020 alone, IBM saw a 20% increase in total cloud revenue, directly driven by Red Hat's hybrid cloud. Simultaneously, Red Hat’s revenue rose by 18% thanks to IBM’s customer reach (IBM Annual Report, 2020). In 2022, Krishna stated in a press roundtable that Red Hat plays a vital role in IBM's corporate strategy, extending beyond the hybrid cloud aspect (Miller, 2020). According to the Q2 2023 IBM earnings call, Red Hat's OpenShift platform is also boosting IBM’s AI business. Additionally, OpenShift doubled its revenue each year since the acquisition (Q2 2023 IBM earnings call transcript, 2023). Master’s Thesis 68 5 Analysis What follows in this section is the analysis of the collected data, primarily from interviews, occasionally complemented by insights derived from secondary data. The analysis is structured according to the data analysis framework outlined in Table 4, section 2.6, and analyzed using Eisenhardt’s method as indicated in section 3.1. 5.1 Within case analysis 5.1.1 Google’s acquisition of Motorola 5.1.1.1 Overall corporate perspective Motivations and goals “Motorola Mobility’s total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers.” – Larry Page, Google’s founder and CEO (Joint Press Release, 2011) In 2011, Google's CEO at the time publicly welcomed Motorolans to the family of Googlers and expressed enthusiasm about future collaboration in the Android space. Since his statement, there have been quite a few twists and turns on the road for both Motorola and Google. This section explores what the internal experts had to say about this acquisition. Master’s Thesis 69 When it comes to the motivation and goals for this acquisition, the answers of the interview participants aligned with the secondary data presented in section 3.2. They both state that Google's acquisition of Motorola Mobility was strategically motivated by two key factorsentering the mobile phone market and securing dominance in search and advertising space. Google intended to leverage hardware integration and enter the mobile phone market by relying on Motorola's manufacturing expertise and brand recognition. The goal was to create innovative Android devices that could compete directly with industry leaders such as Apple and Samsung. By controlling both hardware and software, Google aimed to enhance its influence over the user experience and potentially offer more competitive pricing for Android phones, as well as expand its influence in the mobile advertising space. “Motorola had a well-established reputation for innovation in the mobile devices space. This acquisition was poised to elevate the Android ecosystem. It was expected to delight bothend-users and manufacturers”– Product lead for Android While some interview participants mentioned other anticipated benefits, such as streamlining software development and distribution, the most mentioned objectives were boosting overall Android device market share, increasing sales of Motorola-branded Android devices, developing specific innovative Android devices, and potentially reducing hardware fragmentation within the Android ecosystem. However, the ultimate corporate goal was focused on dominating search and advertising space. The Motorola acquisition seemingly aligned with these goals, aiming to strengthen the Android ecosystem and explore hardware integration in line with Google's broader long-term vision. However, while Google gained valuable patents, the competitive smartphone market proved challenging, leading to Google's decision to eventually sell Motorola. Master’s Thesis 70 “Most of Google’s revenue was, and still is, coming from advertising. Getting advertising on mobile phones was a no-brainer, it was a must. All the competitors already had it integrated. That’s why Google wanted to have Android on as many phones as possible.”– Digital Strategy Lead When asked about the specific criteria and the process of assessing Motorola Mobility to ensure it aligned with the Google’s corporate goals, one of the executives said that Google starts this process by looking into future trends before deciding to invest in M&A deals, particularly the expensive ones: “In general, long before making significant investments we start by looking at the megatrends. However, our approach goes beyond this initial step. We project our vision 10 to 20 years into the future, contemplating how something created today can serve and transform the world tomorrow. We consider the evolving needs of the world, comparing what will be essential in the future to what is relevant now. Our focus is on creating solutions that contribute to making the world a better place— something that benefits people, the planet, and creates long-lasting positive change. We actively seek innovations that not only emerge but also stay, not just as short-term conveniences. Motorola promised a shift towards mobile phone advertising, which stood out as the decisive trend.” – Corporate development director Based on the findings, The Market Power Theory, which aims to increase the acquirer's market advantage, effectively explains Google's motivation for acquiring Motorola. This also aligns with Katz's (2021) claim that Big Tech acquisitions are often driven by a desire to "kill the competition". Master’s Thesis 71 Aiming to integrate hardware and software also suggests elements of the Efficiency Theory, which focuses on optimizing resource allocation and achieving common goals through synergies. Risks Despite the thorough analysis, some challenges seem to have been overlooked. According to the interviews, Google discovered some unfavorable information about Motorola Mobility during the initial due diligence phase and was well aware of the risks. Despite this awareness, it decided that the benefits outweighed the risks and proceeded with the acquisition. The interview participants indicated that the issues mainly revolved around Motorola’s market decline, patent portfolio, and high operating costs. Motorola was losing market share to Apple and Samsung, raising questions about its long-term viability and the value of its phone business. Regarding the patent portfolio, it seemed that its relevance might have been questionable due to focusing on easily challenged patents in terms of complexity and cost. Following the sales decline and market share shrinkage, operating costs rose. Some secondary sources suggest that the sales decline was attributed to the high prices of products. Motorola attempted to sell a 4G smartphone exclusively through its main carrier, AT&T. Their first flagship phone for the carrier featured a unique laptop dock that attracted some customers. However, the high combined price of $199 for the phone and $499 for the dock, or $599 bundled together, deterred potential buyers. A similar pricing mistake occurred with the Xoom tablet, initially priced at $799 compared to Apple's iPad 2, which was an alternative sold for $499 with less memory (Cheng, 2011). While the interviewees were unable, due to privacy concerns, to share explicit information regarding specific risk assessment methods or frameworks utilized by Google during the acquisition Master’s Thesis 72 of Motorola, they did suggest a couple of points where Google could have adopted a different approach to mitigate risks. One suggestion was negotiating a lower price. Considering Motorola's diminishing market share, Google might have successfully negotiated a reduced acquisition price to reduce the financial burden. An alternative approach that Google could have considered was concentrating solely on acquiring Motorola's patent portfolio. This strategy might have been more cost-effective, offering the desired protection for Android without the complexities of managing a struggling hardware business. The eventual sale of Motorola's hardware division at a loss also supports the notion that a more concentrated focus on patents might have been a more efficient strategy. “Safer option could have been acquiring just the patent portfolio, instead of the entire hardware division.” - Emerging technologies engineer In terms of how did interview respondents see the outcome of the acquisition, some believed Google had absolutely no benefits from the acquisition, saying “Google never made any money from this acquisition”, while the others argued that “it wasn’t all that bad in the end”. Many agreed that Google benefitted from the Motorola acquisition in several ways. Initially, the acquisition granted Google access to Motorola's patents, which enabled it to protect the manufacturers using its Android software against patent lawsuits. Furthermore, it allowed the company to experiment with manufacturing smartphones under the Moto name. As indicated by Winkler & Ante for Wall Street Journal (2014), the Google’s sale of Motorola to Lenovo facilitated the creation of another Android handset maker, potentially responding to Samsung's dominance. Lenovo's expertise in hardware manufacturing and its extensive supply chain positioned it well to introduce low-cost Android devices to the market, expanding Android's reach globally and potentially even challenging Apple's market share. Master’s Thesis 73 The additional information I've gathered through interviews was about how Google's target selection and evaluation processes have evolved since the Motorola acquisition, particularly how they've been adapted to avoid risks. Initially, Google focused on investing in larger companies with strong innovation and growth potential, as exemplified by the Motorola acquisition. However, as Google's Search dominance grew, the company shifted its focus towards acquisition programmes. This approach prioritizes acquiring smaller startups with rapid growth potential that align with Google's strategic goals, minimizing the risks associated with larger acquisitions like Motorola. Rehm et al. (2012) defined programmatic M&A as a strategic approach to managing a series of M&As as part of a larger, coordinated program. Unlike individual, large transactions, in programmatic M&A an acquirer pursues multiple smaller deals, usually with a specific strategic objective and established timeframe. (Rudnicki et al., 2021) “We first build a pipeline of potential targets. The data is collected and inserted into the database. AI is essentially used to analyze the data and suggest the best potential targets out of hundreds or even thousands of names. It also identifies the risks and benefits associated with the targets. Then we have the team that manually goes through the AI selected targets’ data to verify it. If all is fine, the due diligence and negotiations teams take it from there.” – Director of strategy and M&A- Generative AI The interviewees' preference for acquiring just the patent portfolio aligns with Park et al.'s (2013) theory, which suggests that it can be more beneficial and less risky for an acquirer to target specific parts of a business or an asset, such as a patent portfolio, rather than buying the entire company. This approach highlights the importance of considering both the overall corporate and specific Master’s Thesis 80 respondents was a lack of transparency from Motorola’s side. Specifically, there was speculation about hidden liabilities at Motorola. Some participants believed that Motorola might have been involved in ongoing patent infringement lawsuits that weren't readily apparent during the initial evaluation because they were not transparently communicated by the Motorola teams. As the interview conversations unfolded, I found that Google's initial selection and evaluation strategy goes beyond merely identifying innovative companies. Even though this information is not directly related to the Motorola acquisition case, I found it relevant for understanding Google’s preliminary due diligence procedures and early evaluation process, and therefore, I included it in this analysis. Google actively fosters an environment that cultivates and nurtures innovation, allowing it to identify and acquire high-potential companies early in their journeys. This approach is characterized by two key pillars: fostering innovation and supporting startups while gaining early access to innovation. “At Google, our duty is to promote innovation. This is why we build ecosystems that encourage and support exceptional startups to actively innovate. Many of our acquisitions come from partners who already work with us in some way. If they have been benefiting from us all along, why not merge the powers? We aim to be a part of their journey early on and long before the acquisition takes place.” – Corporate development director Firstly, Google fosters innovation and builds relationships with the startup community through its extensive open-source approach. By providing free access to powerful and reliable tools and platforms, Google empowers startups to build and grow, while simultaneously allowing the Master’s Thesis 81 company to identify promising targets within the open-source ecosystem. Google strives to be an appealing acquirer by offering startups its wide pool of resources, helping them to reduce development costs and allowing them to focus on core areas such as product development and marketing. During the Motorola acquisition, Google aimed to enter the smartphone market and actively sought targets involved in Android development to invest in. Secondly, Google's 'Google for Startups' program directly supports innovative and growing businesses. Through this program, high-potential startups receive support in the form of mentorship, training, funding, and networking opportunities, promoting their growth. This program not only enables startups to benefit from Google's resources but also grants Google early access to sources of innovation, allowing them to identify and potentially acquire these high-potential companies at an early stage. By fostering a collaborative ecosystem, Google for Startups not only contributes to the success of emerging businesses but also plays a pivotal role in shaping the future landscape of technology and entrepreneurship. Besides implementing this dual approach, Google prioritizes data-based decision-making in assessing targets. AI tools are increasingly used in this case due to the fact that Google often acquires through acquisition programmes, which require quick, efficient, but also precise processing of huge amounts of data. “We heavily rely on data, and lately, AI is becoming a major tool for this. Especially with acquisition programs, it is not feasible to process huge amounts of data in any other way. The latest trends and shifts all point towards AI and machine learning, and that's the direction we are heading as well. However, we have a greater responsibility as the shapers of these changes. We are expected by default to deliver Master’s Thesis 82 better and more advanced results than everyone else.” – Director of strategy and M&A- Generative AI Table 7 summarizes the findings of Google's acquisition of Motorola. Google’s acquisition of Motorola Perspective Factors Overall corporate Motivations and goals: ● Enter mobile phone market ● Establish dominance in search and advertising Risks: ● Motorola's market decline ● Motorola’s patent portfolio relevance ● Motorola’s high operating costs Suggested mitigation approach: ● Negotiating a lower deal price ● Focusing solely on patent acquisition Specific strategic Innovation: Goals: ● Expanding IP portfolio ● Securing Android ecosystem through hardware integration Assessed dimensions: ● Patent portfolio strength ● Manufacturing expertise ● Market and brand analysis ● Technical expertise evaluation Preliminary due diligence: Assessed Dimensions: ● Strategic fit ● Team skills ● Risks Challenges: Master’s Thesis 83 ● Complex IP scrutiny ● Lack of transparency Table 7. Google’s acquisition of Motorola 5.1.2 IBM’s acquisition of Red Hat 5.1.2.1 Overall corporate perspective Motivations and goals When asked about the motivations for the Red Hat acquisition, a Senior Vice President for Global Software Businesses at IBM responded: “We understand our customers' needs, yet we may not always have the capacity to develop everything on our own and do it fast enough. Therefore, we rely on partners to assist us. In return, we support these companies in accelerating their growth and establishing entirely new ecosystems, allowing us to consistently serve our customers.” This statement gave a great introduction to what the rest of the interview participants said. Although the interviews didn’t provide much additional information beyond what is already known and publicly shared, I was able to capture some details that can contribute to the secondary data presented in section 3.3. Master’s Thesis 84 At a high level, the statement from the Head of Strategy for Cloud Consulting in EMEA, describes IBM's acquisition strategy: “We always look for the right time for everything. We look ahead where the market goes, even though this can be hard to predict. This is why our primary focus is to align with our overall strategies that are focused on software and consulting. We look for valuations that are attractive and financial models that align with what we want to do.“ The main motive, as indicated by the interviewees, was the ability to compete in the cloud market, which was quite tactical with a concrete goal in mind. IBM, traditionally known for its hardware and enterprise software, was facing increasing competition in the cloud market. Red Hat, on the other hand, was a leader in open-source cloud solutions and had a reputation for flexibility and innovation. Acquiring Red Hat allowed IBM to instantly gain a significant foothold in the cloud space. As organizations were increasingly adopting hybrid cloud models, combining public and private cloud infrastructure, Red Hat's solutions perfectly complemented IBM's existing hardware and software portfolio, enabling them to offer a comprehensive hybrid cloud platform together. “Since the Red Hat acquisition, IBM has been on a fast track to becoming the leader in Hybrid Cloud, and the results speak for themselves.” – General manager- M&A strategy and development As we touched upon the specific key performance indicators during the conversations, the interviewees mainly mentioned revenue growth and customer base growth and retention. Red Hat's subscription-based model offered a recurring revenue stream, which was highly attractive to IBM's long-term financial goals. Overall, the strategic move sought to cultivate a more agile and Master’s Thesis 85 collaborative environment, fostering accelerated development cycles and the creation of cuttingedge solutions. In addition, the acquisition aimed to enhance customer satisfaction and loyalty by offering a more comprehensive cloud platform. This way, IBM hoped to strengthen its position in the competitive market and serve a wider range of customers. Similar to Google's motivation for the Motorola acquisition, IBM also aimed to increase its market power. Acquiring Red Hat positioned IBM as a one-stop shop for businesses dealing with the complexities of hybrid cloud environments, aligning with both Market Power Theory, which seeks to gain market share and influence, and Efficiency Theory, which pursues operational efficiencies through complementary offerings. There were also indications of motivations described by the Free Cash Flow Theory, as IBM's goals included revenue and customer base growth. Risks Throughout the interviews, there was one concern mentioned by multiple participants that, according to them, presented a risk for this acquisition. This concern was successfully merging the open-source culture of Red Hat with IBM’s more rigid corporate culture. Before the acquisition, many sources stated that this would be a problem because Red Hat allows its engineers to freely work on open-source projects that don’t necessarily benefit Red Hat, while IBM had a more traditional approach in this regard (Taft, 2018). Another concern that came up in the interview conversations, but was considered less threatening, was the fact that Red Hat’s partners were direct competitors of IBM in the cloud space, such as Microsoft, AWS, and Google. This meant that the acquisition was expected to cause change in the dynamics in these partnerships, which, eventually was not the case. Master’s Thesis 86 To mitigate the risk of cultural clash and ensure a smooth transition, IBM decided to allow Red Hat to continue operating independently. Interviewees emphasized the paramount importance of preserving Red Hat's entrepreneurial environment and maintaining an unstifled level of innovation. In particular, IBM wanted Red Hat to keep the focus on open-source technology intact. Consequently, this entailed establishing separate reporting structures while fostering open communication channels between the two entities to maintain transparency and collaboration. Some also feared that functioning separately might be complex due to the additional bureaucracy. “We committed to upholding Red Hat's dedication to open-source principles and we engaged in numerous conversations with Red Hat officials and the developer community to reassure them of this commitment.” –Vice President of Global Software Businesses In 2018, Jim Whitehurst, Red Hat’s CEO and President at the time said: “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience – all while preserving our unique culture and unwavering commitment to open source innovation.” (Red Hat website, 2018) In response to the question of whether IBM used any particular framework or method to identify the risks during the due diligence and how reliable they were, the General Manager of Strategy responded that there was no specific framework because each M&A case is different. “There is not really one single framework that we use, the process differs from case to case. Overall, we would use usual VC metrics, meaning we look at sales, customer acquisition costs, year on year growth, sales churn rates etc. They might be already Master’s Thesis 87 serving our customers successfully, we want to know how to join and serve the customers together.” – GM Strategy and Development 5.1.2.2 Specific strategic perspective Innovation IBM acquired Red Hat’s open-source software that was rapidly gaining traction and combined it with their own hardware and software offerings. The interview participants said that the ultimate goal was to create a new comprehensive hybrid cloud platform, which allowed IBM to address the growing demand for hybrid cloud solutions. They all agreed that by acquiring Red Hat's opensource expertise and big developer community, IBM wanted to enhance its own cloud offerings. This upgrade was meant to allow the company to stay competitive in the market and meet everevolving customer expectations. However, they knew that this alone was not enough to secure success in the long run. IBM needed to continuously enhance its cloud offerings to maintain a competitive edge. “Getting access to Red Hat’s knowledge base was just the initial step. We needed their expertise to keep the momentum” – Red Hat director for EMEA “By leveraging Red Hat's expertise and developer base, we could continue expanding our own portfolio of offerings.” - Innovation Architect In regard to the measures that IBM used to evaluate Red Hat’s alignment with its innovation goals, one of the interviewees said, “In general, what we look for is the worth of the assets that we want. It could be patents, data, skills, and how much growth this acquisition could potentially bring to our portfolio.” Overall, based on the interviews, four dimensions stood out that IBM recognized as Master’s Thesis 88 crucial for leveraging Red Hat's strengths to drive innovation in the hybrid cloud offerings. The dimensions are described below. Cloud Architecture: This involved a comprehensive analysis of Red Hat's core technologies, particularly their containerization platform (Red Hat OpenShift) and cloud management solutions. Understanding the cloud architecture was crucial for integrating Red Hat's technology into IBM's existing cloud infrastructure effectively. This evaluation helped identify synergies between the two platforms and opportunities for innovation. Open-Source Compatibility: Given IBM's proprietary software ecosystem and Red Hat's focus on open-source technologies, assessing compatibility was critical. IBM had to ensure that Red Hat's open-source solutions can seamlessly integrate with its proprietary offerings without causing conflicts or disruptions. This assessment helped IBM leverage the benefits of open-source innovation while maintaining compatibility with its existing technology stack. Interoperability: Interoperability is essential for a hybrid cloud platform, allowing seamless connectivity between different cloud environments. IBM evaluated how Red Hat's solutions enable interoperability between on-premises infrastructure and various public cloud providers. This evaluation helped IBM create a joint hybrid cloud platform that offers flexibility and scalability to customers while driving incremental innovation in cloud computing. Talent Retention Strategy: Ensuring that Red Hat had an efficient retention strategy in place was a crucial factor for long-term success after the acquisition because Red Hat's engineering talent and developer community were the sources driving innovation. IBM also ensured to develop a strategy from its side to retain key personnel and leverage their expertise in open-source development methodologies post-acquisition. Master’s Thesis 89 “We rely on Red Hat. Our partnership has stood the test of time, and IBM couldn't risk losing any of its superstars. We had to make sure they continue the journey with us.” – Data and technology innovation director As observed in the findings, when IBM acquired Red Hat, its goal wasn't solely focused on a single type of innovation, but rather on a strategic combination of architectural and incremental innovation. The primary driver behind the acquisition was to leverage existing technologies, aligning with the definition of architectural innovation. Additionally, IBM aimed to create a new cloud platform while maintaining its competitive edge. In this regard, incremental innovation, referring to the strategy of making small, gradual improvements to existing products, services, or processes, also played a significant role. Preliminary due diligence procedures The initial due diligence procedure was driven by IBM's strategic investment focus and a commitment to building a cohesive ecosystem. The emphasis on strategic alignment, engagement with internal and external stakeholders, and a systematic evaluation process contributed to a comprehensive understanding of Red Hat's potential fit within IBM's ecosystem. By involving various contributors and leveraging both internal and external resources, IBM aimed to ensure that the acquisition would not only be innovative but also strategically valuable to their long-term goals that rely on acquisition programmes. “We are strategic investors first, focused on building the ecosystem. Therefore, the target needs to align with our acquisition programme. It is not enough to only be innovative and demonstrate a high potential for profitability.” – Executive Vice President of Corporate Development Master’s Thesis 96 Risks When it came to identifying and mitigating potential risks, it seemed that the proactive and reactive roles here took turns. While IBM took a proactive approach to risk management, Google had a rather reactive response. Despite becoming aware of several challenges during the due diligence process, such as Motorola's declining market share, the scrutiny surrounding the relevance and strength of its patent portfolio, and the rising operating costs amid declining sales, Google concluded that the benefits outweighed the risks and proceeded with the acquisition. The rationale behind this decision centered on securing Motorola's patent portfolio as soon as possible and proceeding with pursuing its long-term goals. However, it appeared that Google underestimated the difficulties associated with managing a struggling hardware business, as the acquisition ultimately yielded unfavorable results. In contrast, IBM adopted a proactive stance towards risk mitigation. Recognizing early on the potential for a clash of corporate cultures, IBM identified this as a significant risk and took steps to address it. To mitigate this concern, IBM allowed Red Hat to maintain its independence. This involved establishing separate reporting structures and fostering open communication channels to maintain transparency and collaboration, all while preserving Red Hat’s entrepreneurial spirit and expertise in open-source technology. IBM viewed this approach as essential for the success of the hybrid cloud platform they envisioned. Overall, while both companies identified potential risks during the target evaluation, Google only acknowledged them after the initial analysis and proceeded with the acquisition regardless. Conversely, IBM identified the risks and implemented a mitigation strategy to preserve Red Hat's value proposition. Master’s Thesis 97 As seen in the interviews analysis in section 5.1.2.2 under the Risks section, Google acknowledged that their acquisition approach has evolved over time, with a current focus on acquisition programmes involving smaller startups in clusters, a strategy that carries less risk compared to acquiring larger entities like Motorola. IBM, however, did not mention specific risk assessment frameworks, indicating a case-by-case approach that takes into account traditional VC metrics such as sales growth and customer acquisition costs. In conclusion, it seems that Google's risk assessment approach in the Motorola acquisition was not fully accurate. It emphasized potential benefits, but missed to recognize the magnitude of the identified risks. Nonetheless, the company learned from its mistakes and adjusted its approach for improved outcomes in the future. On the other hand, IBM's proactive risk mitigation strategy ensured successful integration and collaboration between the two companies, while at the same time maintained a more conventional approach to target evaluations, which appears to have been yielding positive results for them. 5.2.2 Specific strategic perspective Innovation It was evident that both Google and IBM aimed to gain innovation through the acquisitions. However, their innovation goals and target evaluations differed considerably. Google's approach appears more opportunistic, driven by the need to protect the Android ecosystem through patents and enter the competitive mobile phone market. IBM's approach seemed more strategic. They identified a growing market need (hybrid cloud) and targeted a specific company (Red Hat) with Master’s Thesis 98 complementary expertise to create a new offering. The focus on open-source compatibility and talent retention suggested a long-term commitment to this acquisition. Google's innovation goals for the Motorola acquisition seemed less specific compared to IBM's. Google aimed to integrate software and hardware and potentially create new phone models, but the concrete plan remained unclear. IBM, on the other hand, had a clear vision of creating a new hybrid cloud platform. Google's strategy revolved around evaluating Motorola’s patents, viewing them as critical assets of this acquisition. This emphasis on intellectual property (IP) was driven by the desire to secure a competitive edge and potentially deter competitors through legal means. Additionally, Google sought to harness Motorola's manufacturing capabilities to optimize hardware design and production processes. Moreover, considerations regarding brand recognition and market positioning were carefully weighed, with the consideration of driving user adoption of jointly developed products. Throughout this process, Google prioritized the alignment of its acquisition targets with long-term vision and strategic goals, leveraging patents as a cornerstone of its innovation strategy. IBM’s focus extended beyond IP and involved broader evaluations of Red Hat’s technologies and other business aspects to ensure the compatibility and long-term collaboration. IBM's innovation goals revolved around the creation of a comprehensive hybrid cloud platform, leveraging Red Hat's open-source expertise to drive this endeavor. At the same time, IBM recognized the importance of continuous improvement, seeking to enhance its existing cloud offerings through the integration of Red Hat's technologies and talent pool, which would eventually reposition IBM favorably in a Master’s Thesis 99 rapidly evolving market landscape. In doing so, IBM sought to strike a balance between innovation and collaboration, leveraging the strengths of both organizations to drive collective success. Overall, both acquisitions involved reconfiguring existing technologies and business models to create new value propositions, indicating the architectural innovation approach. While this was the primary focus for both, they also demonstrated the incremental innovation approach to some extent. Google potentially aimed to improve existing Android devices through hardware integration. IBM looked to enhance its own cloud offerings by leveraging Red Hat's expertise. Preliminary due diligence Google's due diligence prioritized long-term vision and the identification of companies that aligned with their future trajectory. They actively sought targets that addressed critical technology gaps and held the potential to boost revenue streams. Future trends and the target's innovation potential were central to their evaluation process. This visionary approach highlights their focus on opportunitydriven acquisitions that could propel them ahead of the curve. On the other hand, IBM's due diligence emphasized strategic alignment within their existing ecosystem and long-term goals, heavily influenced by their established acquisition programmes. They looked for targets that complemented their current offerings and fostered a cohesive ecosystem. This strategic alignment ensured the acquisition wouldn't disrupt their existing landscape but rather strengthen it. These different strategic priorities were manifested in the design of their due diligence processes. Google prioritized a visionary, outward approach, actively seeking innovative targets and remaining agile to sudden opportunities. Its use of AI-powered data analysis and its cultivation of an external innovation ecosystem set it apart. Furthermore, Google actively relies on data-driven decision-making processes. With the support of AI tools, the company efficiently processes large Master’s Thesis 100 amounts of data during the due diligence process which enhances the accuracy and efficiency of their evaluations, ultimately ensuring informed decision-making. While Google appears to initiate the target search process outwardly, beginning with a focus on long-term vision and megatrends, and subsequently seeking available opportunities to bridge the gap towards achieving that vision, IBM takes an inward approach. IBM begins by identifying internally the aspects that could enhance their productivity and market position before proceeding to seek targets that align with these identified goals. By relying on its teams to recognize emerging needs and trends, IBM fosters a culture of innovation and alignment with current business objectives. Existing partnerships are also prioritized, capitalizing on established trust and relationships to facilitate smoother integration and collaboration. Open and transparent communication in strategic sessions with the target’s team plays a crucial role in IBM's approach, allowing for in-depth discussions with target company executives to define joint goals and key performance indicators (KPIs). By establishing a clear understanding of expected outcomes early on, IBM ensures alignment throughout the negotiation process. Beyond internal channels, IBM embraces open prospecting, actively seeking suggestions from employees, subcontractors, and external partners such as venture capitalists. This broadens the acquisition funnel, potentially uncovering hidden opportunities and fostering a diverse portfolio of targets. While both companies conducted thorough evaluations considering strategic fit, team skills, and potential risks, their core strategies were different. Google prioritized a visionary approach, actively seeking innovative targets that aligned with their long-term vision. IBM, on the other hand, focused on building a strong ecosystem through strategic acquisitions that complemented their existing offerings. Additionally, Google embraced AI for data-driven decision-making, while this aspect was not emphasized in IBM’s due diligence process. Master’s Thesis 101 5.2.3 Key findings The cross-case analysis, conducted from two perspectives, overall corporate and specific strategic, suggests that target selection and early-stage evaluation practices significantly influenced the contrasting outcomes of Google's Motorola acquisition, which was a failure, and IBM's Red Hat acquisition, which has been successful. This section presents a breakdown of how these practices played a role. From an overall corporate perspective, both companies were essentially motivated by the same goals - gaining market power and increasing efficiencies. However, they took completely different approaches to achieving these goals. Google sought to strengthen its position in the market it was already strong in (digital advertisement) by entering a new market (smartphone). For IBM, the acquisition was a source of expertise as a key to achieving its goal, which was establishing itself in a space it was not previously strong in (cloud). The types of acquisitions chosen by each company also reflected their strategic priorities. Google's acquisition of Motorola, a congeneric acquisition, aimed to create synergies, while IBM's acquisition displayed characteristics of horizontal integration aimed at positioning itself in the new market and vertical integration aimed at accelerating growth in the same. The outcomes of these acquisitions further highlight the contrasting approaches to risk evaluation. While Google overlooked the potential pitfalls, IBM's rather traditional but proactive approach secured successful integration. When it comes to target selection, Google appeared to take a more proactive, visionary approach, aiming to disrupt the market and protect their Android ecosystem by entering the hardware space. However, this proactive strategy might have led them to overlook the immediate risks and Master’s Thesis 102 challenges. They might have underestimated the complexities of managing a declining hardware business and integrating a different corporate culture, which indicates that evaluating the target from the specific strategic perspective might have been omitted by Google. IBM, on the other hand, took a reactive, rather tactical approach, seeking to catch up with established cloud players by acquiring Red Hat. While reactive, their focus on a well-established player in the growing market provided more sustainable results. IBM clearly identified the risk of cultural clashes with Red Hat and took steps to mitigate it, which suggests a more comprehensive evaluation process on IBM's part, taking both overall corporate and specific strategic perspectives into account. Looking at the specific strategic perspective, both acquisitions aimed for architectural innovation, which involved reconfiguring existing technologies and business models to create new value propositions, as well as incremental innovation aimed at continuous development. However, the level of specificity in their innovation goals differed. Google's goals for the Motorola acquisition seemed less concrete, while IBM, on the other hand, had a well-defined goal of diversifying the portfolio and establishing a new offering. In regard to the strategic fit evaluation, Google prioritized potential future benefits over immediate strategic fit. Integrating hardware expertise might have seemed strategically sound in the long run, but it wasn't necessarily the most pressing need for Google at that time. Considering their ultimate goal of maintaining leadership in the digital advertising space, which included establishing a foothold in mobile advertising, there might have been more efficient ways to achieve it. As the interview respondents mentioned, acquiring just patents instead of the entire company might have been a solution. IBM's evaluation of Red Hat, which was already an established player in the growing cloud market, offered a more immediate strategic fit, directly addressing their competitive gap in the cloud space. This again indicates that IBM likely evaluated the target from both Master’s Thesis 103 perspectives (overall corporate and specific strategic), as they considered long-term goals while efficiently responding to current business needs. In the preliminary due diligence process, one of the main differences between the acquirers lies in their approaches to recruiting and selecting targets. Google tends to cultivate a diverse pool of potential targets and uses AI for large-scale evaluations. Essentially, Google begins by assessing what's available and then proceeds to select promising targets from this pool according to identified megatrends and long-term vision. In the Motorola acquisition, Google's approach might have helped in identifying a target that aligns with its long-term vision, but with this approach, an indepth analysis of the target's current state might have been neglected. Conversely, IBM takes a more targeted approach, starting by defining the current business needs and then selecting targets that align with these criteria. IBM does this by leveraging internal teams to identify business needs and seeking targets among its established partners that can fill those gaps, suggesting a more grounded evaluation process that considers the current market landscape. Ultimately, it appears that Google starts the selection process by evaluating targets from the overall corporate perspective and IBM starts this process by evaluating the targets from a specific strategic perspective. Despite the differences, both companies begin by examining their existing network of partners and companies they have previously collaborated with. However, they remain receptive to opportunities from other sources, keeping their options open for engaging with entities that suit their objectives. Table 9 summarizes the similarities and differences of Google’s and IBM’s approaches. Master’s Thesis 104 Factor Google (Motorola) IBM (Red Hat) Overall corporate perspective Motivations and goals • Gain market power, improve efficiency • Proactive, focused on future disruption • Visionary, future benefits over immediate strategic fit • Gain market power, improve efficiency • Reactive, addressed competitive gap in the market • Tactical, focus on immediate strategic fit Risks Underestimated risks during evaluation Proactively identified and mitigated risks Acquisition type Congeneric Horizontal and vertical Specific strategic perspective Innovation Opportunistic, exploring new realms Strategic, enhancing current offerings Preliminary due diligence Outward-looking, opportunities from the outside Inward-looking, consulting employees and partners Outcome Unsuccessful Successful Table 9. Cross-case analysis summary Master’s Thesis 105 6 Discussion As indicated by multiple authors in sections 2.1.4 and 2.1.5, M&As are a risky business for companies seeking growth and innovation (Cartwright & Cooper, 1995; Krug and Aguilera, 2005; Paumen, 2023; Christensen et al., 2011; Park et al., 2013; Angwin, 2020), which was also confirmed by the findings from Google and IBM case studies. While they offer the potential to expand market share, acquire valuable resources, and enhance technological advancements, a misstep in target selection and early-stage evaluation can lead to costly failures (Savovic & Pokrajcic, 2013; Celik et al., 2022; Pereiro, 2015). This comparative analysis of Google's acquisition of Motorola and IBM's acquisition of Red Hat revealed valuable insights into how these critical processes can significantly influence the outcome of an M&A endeavor. While current literature provides a rather general approach to target selection and evaluation, as indicated, for example, by Savovic and Pokrajcic (2013) during the preliminary due diligence phase (see section 2.1.4) and several other authors (see section 2.1.5), this study provides missing steps in this process which are particularly adjusted to the needs of technology companies acquiring innovation. Most authors in the evaluation stage propose a rather rushed jump from the target selection to due diligence (Savovic & Pokrajcic, 2013; Hassan, 2014; Kaplan & Weisbach, 1992), indicating that the selection almost by default leads to the start of negotiations and legal and auditing valuations, disregarding the strategic aspect. However, it was seen in Google’s and IBM’s cases that in practice this process is much more nuanced and requires more attention to the initial evaluation phase which occurs before the decision has been made. This study provides several key findings about the role of target selection and evaluation practices in acquiring innovation and enhancing the success of M&A deals. These findings are balancing between proactive and reactive strategies, evaluation from overall corporate and specific strategic Master’s Thesis 112 7 Conclusion This research investigated how Big Tech companies select and evaluate target companies for mergers and acquisitions (M&A) when their primary goal is to acquire innovation. By analyzing the cases of Google's acquisition of Motorola and IBM's acquisition of Red Hat through two key perspectives, overall corporate and specific strategic, the study revealed the approaches and procedures employed by these tech giants. On a broader level, it provided insights into how these practices can contribute to the outcome of an M&A deal. Analyzing the interplay between the two aforementioned perspectives, the study identified three distinct approaches to target selection and evaluation processes that can enhance the outcome of an M&A. These approaches are balancing proactive and reactive strategies, evaluation from overall corporate and specific strategic perspective, and balancing an outward and inward approaches. 7.1 Managerial implications The empirical part of the study contributes to the knowledge of M&A target evaluation practices and offers valuable insights for high-tech companies considering M&A as a tool for growth and innovation. By applying these insights, companies can enhance their chances of making more informed decisions that benefit their overall innovation goals. However, it's important to remember that successful M&A is a complex process. While target selection and evaluation are crucial first steps, successful integration and post-merger management are also essential for achieving desired outcomes and long-term value. Master’s Thesis 113 7.2 Limitations and future research As in every study, there are a few limitations in this study as well. Firstly, this study only explores the target selection and initial evaluation phases of the acquisitions, and there might have been other factors contributing to the success or failure of these acquisitions as well. Nonetheless, the findings highlight the critical role of target selection and early-stage evaluation in determining the ultimate success of an M&A endeavor. Secondly, the data relies on interview data, which could be biased. Thirdly, the study examined only two case studies. For more comprehensive results, further research that examines and cross-compares additional case studies would be needed. 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(2009) Case study research: Design and Methods. 4th ed. Applied Social Research Series: Sage Publications (5) Master’s Thesis 131 APPENDIX Appendix 1. Interview questions Target selection and initial evaluation Perspective Factors and interview questions Overall corporate Motivations and goals: ● What were the overall strategic motivations and goals that drove Google/IBM to pursue the acquisition of Motorola/Red Hat? ● Can you elaborate on the specific objectives Google/IBM aimed to achieve through this acquisition? Risks: ● How were the potential risks identified during the selection process? ● Were there specific risk assessment methods or frameworks used, and how reliable were they? ● Looking back, is there anything that could have been done differently to mitigate or address the identified risks more effectively? Specific strategic Innovation: ● What type of innovation was Google/IBM aiming for with this acquisition? ● What measures were taken to ensure that the target was a suitable fit for the innovation goals? ● Can you provide insights into the expected outcomes of the acquisition and the advantage that Google/IBM was hoping to get? Preliminary due diligence procedures: ● What were the key steps during the initial due diligence procedure in the case of Motorola/Red Hat acquisition? ● Can you outline the dimensions against which the target was evaluated during the preliminary due diligence phase? ● Were there any challenges or unexpected findings during the process and Master’s Thesis 132 how were they addressed? Table 1. Interview question sent to the participants ahead of the interview Additional interview questions: • Could you introduce yourself and tell a bit more about your role? • To what extent are you familiar with the process of the Motorola/ Red Hat acquisition? • What is your stand on it? How did it benefit the company overall? • How was the acquisition expected to contribute to the company’s growth and brand positioning? • How did it contribute to the innovation goals? If the acquisition didn’t happen, how would Google’s/IBM’s offerings portfolio look today? Would there be any alternatives, if so, what? • How do you think the decision-making process was done? What methodologies were used, if any? What was the crucial piece of information that triggered the decision? • What were the biggest challenges? • How did the cultures and the management merge? • From your perspective, what could have been done differently?