Hi-tech is hot but take care not to get burnt; The landscape is littered with tech deals that fell short

March 14, 2014 7:48 pm

Hi-tech is hot but take care not to get burnt

By Brooke Masters

The landscape is littered with tech deals that fell short

News this week overflowed with evidence that the appetite for groovy sounding technology companies is rising to heights not seen since the dotcom bubble of the late 1990s.

Not only did King, maker of the Candy Crush Saga app, announce plans to float in New York at a price that will give it a $7.6bn valuation, but Boohoo.com, the UK online retailer with annual pre-tax profits of just £3.2m, saw its shares pop more than 50 per cent when it debuted on London’s junior market, giving it a market cap of more than £800m. Investors are not the only ones on the prowl for hot hi-tech bargains. Strategic buyers of all types have been snapping up technology and data companies like they are going out of style. Under Armour, the sportswear maker, recently paid $150m for a fitness technology company called MapMyFitness and Monsanto, the US seed company, splashed out $900m on a data analytics start-up.

Global technology mergers and acquisitions jumped 65 per cent last year to a post-dotcom bubble record of $188.2 billion, according to statistics from EY. Non-technology corporate buyers are also accounting for an increasing share of the much larger deal pie – they accounted for 14 per cent of deals by value, up from 10 per cent last year.

But the odds are high that much of this impulse buying will end in tears. Wm Morrison, the struggling UK supermarket chain, provided a cautionary tale on Thursday when it took a £163m writedown and said it would sell Kiddicare, an online baby goods retailer that it had purchased with much fanfare for £70m in 2011. Morrison executives had hoped the purchase would help the company – which, until recently, had no online presence – learn about the intricacies of selling via the internet. The technology failed to live up to expectations, and Morrison inked a £200m partnership with Ocado, the online grocer, instead.

Nor is Morrison an isolated case. The landscape is littered with technology M&A deals that fell short. Remember News Corp’s misadventure with networking site MySpace, which it bought for $580m and finally offloaded for $35m six years later? And the 2000 Time Warner-AOL merger still stands out in the annals of corporate history as one of the worst deals of all time although, strictly speaking, that was a tech company buying a media property.

The danger for technology companies is that their customers, by their nature, are always searching for the next thing. MySpace was a hot property until Facebook took off, and AOL lost out when users lost their fear of the internet and stopped depending on portals.

Venture capitalists are well aware of the pitfalls of investing in cutting edge technology. They routinely back 10 start-ups in the hope that one makes it big. Ordinary investors and corporations, who need a substantially better batting average, would do well to learn from their experience.