#LessonsfromthePast When Divorce comes to the Rescue

Acquisition for acquisition sake often ends in pains as significant losses are reported if you offload out of failure to integrate. Businesses deep in M&A game evaluate a lot of things before they conclude that a particular target is a good fit and will bring value to their strategic objectives.

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The story I am about to tell was full of hope at the start, and slipped to relative hopelessness at the end. But luck shun on them as divorce became the escape route. We will also find good lessons at the end.

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2005 was eBay’s 10th anniversary, and the CEO Meg Whitman was in good spirit. She rallied her team. The plan was to find a perfect gift to the 10-year-old eBay to (among others) revolutionize customer experience by acquiring an entity that makes it easier for the online action company’s customers to interact better. They found a rising star of the moment, a new internet 2.0 company called Skype – yes, the Skype you know. But you see, sometimes ‘Company Proposes, but Customer Disposes’. The deal went as planned in a transaction that closed at c.$3billion. As at that time, Skype’s revenue was less than $10m. So there were already reasons for watchers to talk – many felt that the price was out of proportion, and that eBay paid too much premium for perceived synergies. eBay’s management felt good about the new wife though. Fast-forward to 2007, eBay wrote down Skype by c.$1 billion. 2 years later, a plan to divest from Skype was on the table. They sold 65% at $2.75 billion enterprise value, and in 2011, they found another buyer for the remnant and cashed out at c.$1.4 billion profit.

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You see, this deal went from what the then CEO Whitman said to be a deal that will “will create an extraordinarily powerful environment for business on the net” to what the next CEO John Dohanoe said not to have “synergies with our e-commerce and online payments businesses.” So what went wrong?

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A failed post-merger integration is a failed strategic fit. One of the cardinal reasons entities embark on operational due diligence (ODD) is to assess synergies. When done wrong, you pay more and get less. But many deals close without this assessment; some do but with internal resources whose minds and emotions are already clouded by the views of executives. Still, some fail despite having external consultants who couldn’t see beyond what management said. ODDs are not just about where to cut headcount; it is an assessment of how value can be extracted from a deal and the ease of both entities functioning together after the transaction is closed. Post-merger integration can fail for some reasons such as lack of cultural fit, lack of strategic alignment of both entities, significant differences in IT infrastructure, regulations, among others.

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The failure of eBay & Skype’s M&A also shows that you must have customers at the heart of your deals. A key element of M&As is understanding your customer. One writer noted that one of the reasons why this deal failed was due to eBay’s inability to properly plot its customer journey vis-à-vis Skype’s customer segment. While eBay was serving those who could easily buy auctioned items online at that time (like cars, furniture - most of who were aged 35 – 45), Skype was then popular mostly with students. So they were largely serving different markets.

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We can see the lessons from the above. If you are in the acquisition game, you must think clearly on an end-to-end basis. Deals made on emotion have higher chances of failure. You can’t take away the need for a carefully done synergy analysis. Clear understanding of both entities’ customer journey and segment are important.

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Finally, you must know when to let go. If Skype had remained with eBay, who knows? Maybe we won’t know them today. That divorce saved Skype (and probably eBay), gave way to the Skype that is with Microsoft today, and gave us an entity that assisted us to navigate the pandemic.