Top 10 technology merger mistakes

After last week's look at some of the most important mergers in the IT world it's time to look at the other side of the coin when mergers show management mistakes.

Most, but not all, of the deals listed below made sense on some level. After all, there may be many fools in the finance industry, but the billion dollar deals we're talking about needed to have some credibility in order to free up the purse strings. Failure was not a guarantee, but it was the result.

We've tried to keep the list fairly recent, and certainly all of these mergers came in the past 15 years and most are in this decade. Given the enormous changes the industry has gone through in that time, it's not surprising that there have been mistakes; no-one is perfect. What is more interesting is how often certain companies seem to make them.

One final note, when Shaun and I had our traditional lunch of burgers, a beer and a blistering argument, one idea came to mind for a future Top 10: mergers we'd like to see. Feel free to add suggestions to the comments section.

Honourable Mention: ITV and Friends Reunited
Iain Thomson: For a lot of people in the UK, Friends Reunited was their first introduction to the new-fangled phenomenon of social networking.

Friends Reunited was literally started in a spare bedroom by British couple Steve and Julie Pankhurst and enjoyed explosive growth, climbing to 2.5 million members a year after launch. It was an instant hit, and Friends Reunited was one of the few internet firms to prosper in the dark days of the post internet bubble hangover that kicked in after the millennium.

ITV, the main commercial broadcaster in the UK, saw the site and liked its potential. With the papers full of how television was having to get on the web, this looked like a good way to gain an instant local user base that could then be turned onto ITV's excellent programming. It paid £120m for the company in 2005 and the Pankhursts grinned all the way to the bank.

Unfortunately for ITV there were two major problems. Firstly ITV doesn't produce much in the way of excellent programming, and secondly the site's users, troubled by the yo-yoing access price and other changes, started to move to other sites. The other bit of bad luck was called Mark Zuckerberg, who registered Facebook.com in the same year that ITV splashed out.

The rest is history. Facebook soared ahead while the audience of Friends Reunited dwindled. In the end the site was flogged off for just £25m.

Shaun Nichols: Thus far, the only real success strategy I can find with social networking sites is to start up, grow as fast as possible, and then sell the company to an unwitting old media firm before all your users get bored and go somewhere else.

The 21st century internet is littered with the empty husks of old social networking sites like Friendster, Friends Reunited and (likely soon) MySpace. In every case, the people who did the best were the ones who sold out their stakes and then got the heck out of town.

Perhaps Facebook will be able to break the cycle and transition into a profitable, long-running business, but right now it looks like the odds are against them. If history is any indication, Zuckerberg and company would be smart to take a couple of billion dollars and cash out.

In the meantime, one has to wonder what the next big networking platform will be. Perhaps Twitter or Google, maybe even a tiny startup we have yet to hear from.

Honourable Mention: AMD/ATI
Shaun Nichols: This merger only barely made our list because, when all is said and done, it may turn out to be a very savvy purchase.

In 2006, chipmaker AMD announced a deal to acquire graphics card vendor ATI for $5.4bn. The move looked at the time to be a tremendous gamble on AMD's part, and for some time after it looked like a bad bet.

Shortly after the deal became official, AMD entered into an extended period of financial losses. Without an offering to match the quad-core chips of rival Intel for much of 2007, the company fell behind in the market and began to lose money while still saddled with debt from the ATI deal.

Lately, however, things have begun to turn around. A spin-off of its Global Foundries operation combined with improved sales and a tidy anti-trust settlement with Intel have boosted financials, while the benefits of an in-house GPU firm are coming in handy as platforms like Stream look to expand multi-threading capabilities.

Iain Thomson: I was a bit iffy about this one. In my opinion the benefits AMD is getting from ATI outweigh the short term problems that the company suffered in terms of financing.

The kind of GPU design skills in a graphics firm makes me suspect that Intel will be making a move for Nvidia before too long.

That said, the short term hit was considerable, and would have been worse if AMD hadn't managed to reach a settlement with Intel as a result of a well organised legal and media campaign against anti-competitive behaviour.

10. AOL/Bebo
Iain Thomson: You're going to see more than one AOL item on this list since the company has been so badly led over the years, but let's get its more recent mistake out of the way first.

Bebo, an abbreviation of Blog Early, Blog Often, was set up during the golden spring of social networking in 2005 by British programmer Michael Birch and his wife.

It was a bog-standard social network but the pair put time and money into it and the site became the dominant platform in some areas, notably South America and particularly in Brazil which has a huge net-savvy population.

With user numbers floating around the 40 million mark by 2008, AOL decided it wanted in on this social networking lark and splashed out $850m for the company, making Birch and his wife very rich geeks indeed.

But, having got the prize, AOL really didn't know what to do with it, and Facebook's domination reduced the value of Bebo daily.

In the end AOL sold off Bebo this year for an undisclosed sum, thought to be around $30m. The best that chairman Tim Armstrong could say about the deal was that it would " create a meaningful tax deduction", which tells you pretty much all you need to know about what a good deal this was.

Shaun Nichols: I could see some of the reasoning behind acquiring Bebo. Social networking was still coming into its own, and with Brazil one of the foremost emerging markets in the world, there was a potential for growth.

Unfortunately, the risk didn't really pan out, and AOL was in no position to take hundreds of millions of dollars in losses.

AOL shareholders have to cringe a bit every time the company announces an acquisition. There are psychic hotlines that have a better record of accuracy than AOL when it comes to seeing the future.

No doubt AOL planned to use its new model as a "content provider" to push Bebo as a social network and media platform, but Facebook managed to put an end to that when it began to siphon away users.

9. Excite@Home
Shaun Nichols: What might have been a good idea in another time and place, the $6.7bn deal between Excite and @Home Networks turned into a clichéd tale of the dotcom boom and bust.

The idea was to provide a service and portal for the burgeoning cable broadband internet market. The service was offered to cable television providers which could then offer subscribers broadband internet access.

Unfortunately, the new company was beset by bad business decisions and economic realities.

Saddled with disastrous acquisitions such as the $430m deal for online greeting card vendor Blue Mountain Arts, and facing a market not quite ready to embrace cable broadband, Excite@Home was in no shape to weather an economic downturn.

When the dotcom bubble burst, the company was wiped out and eventually forced to file for bankruptcy.

AOL often gets chided for missing out on the transition to broadband but, as Excite@Home showed, sometimes seeing the future of the market doesn't guarantee success.

Iain Thomson: The tech industry is strewn with the remains of companies that got too far ahead of the curve and got smashed by the waves of the industry. Excite@Home is a classic example.

Excite was a pretty good search engine, and had been growing by acquisition despite being non-profitable and perilously short of cash most of the time. @Home ran high speed internet services and was looking for a portal of its own. Some kind of a deal made sense, but a merger of this size was as mad as a sack of badgers.

The merger wasn't helped by continuing bad management. Shaun has mentioned Blue Mountain Arts but let's not forget the $425m spent on iMall and the decision to set up a new venture in Australia. No disrespect to my cousins down under, but Europe or Asia might have made a better business plan.

8. AOL/Netscape
Iain Thomson: Our second AOL merger in the list isn't my nomination, to be truthful, but Shaun argued well for its inclusion.

On the face of it, the decision to buy Netscape wasn't too egregious. It made sense from a strategic standpoint certainly. AOL was tied to paying royalties for Microsoft's Internet Explorer and getting hold of its own search engine was certainly something worth having. The problem was that Netscape wasn't worth anywhere near the $4.3bn AOL ended up paying.

AOL bought Netscape in 1998, after the browser company had been crippled by years of Microsoft's giving its main product away for free. You can compete with free, these days at least, but it's a tough struggle and Netscape was losing the plot. The firm never really recovered from Internet Explorer 3 and I suspect the board would have sold out for half the eventual purchase price.

But where AOL really missed a trick was in not considering open source. Netscape had open sourced key browser technology into the Mozilla project before the sell off, so if AOL had trusted open source methods and made a little investment into Mozilla, it could have got a great browser like Firefox for micro-cents to the dollar.

Shaun Nichols: Obviously AOL thought that as the top ISP in the world it could go toe-to-toe with Microsoft, particularly with the powerful Netscape Navigator browser in its arsenal.

Unfortunately, the only thing that was installed on more computers than AOL's internet service in those days was Microsoft Windows, and with Windows came Internet Explorer. The decline of AOL's dial-up service only made things worse.

Given the state of the browser wars at that point, Netscape's stakeholders had to be thrilled to be getting $4.3bn out of AOL. As Iain noted, Microsoft was determined to drive the company into the ground, and bankruptcy may well have been the eventual outcome for Netscape.

It's not all bad, however. The remnants of Netscape eventually blossomed into the Mozilla project and the great Firefox web browser. It would be a nice bit of justice if Firefox eventually pushes Internet Explorer into a minor player in the market.

7. Yahoo/Geocities
Shaun Nichols: Nowhere does the adage 'buy low, sell high' prove to be more true than in the technology world. Yahoo learned this the hard way when it paid $3.57bn for Geocities.

The personal site hosting firm had become an icon of the dotcom boom for its meteoric growth and gaudy user-designed pages with irritating pop-up screens. Yahoo thought that it was getting a major addition that would turn the company into an online titan. Instead, it got a harsh introduction to the fickle nature of the web-going public.

When the deal was made in 1999, Geocities had nowhere to go but down. The dotcom crash dried up advertising money. That, combined with the emergence of blog platforms for personal sites and affordable hosting services for artist and small business sites, and the writing was on the wall for Geocities.

The growth of social networking platforms drove the final nail into the coffin and, by the time the service was mercifully put down in 2009, all that remained was a hollow reminder of the first web boom.

Iain Thomson: When Geocities shut down operations recently I profess to having felt a little twinge, like a part of my youth had passed on. Then again, anything that popularised hamster dance deserves to go.

As Shaun points out, Geocites, along with others on this list, was a case of a company with too much money overpaying in a fevered time. Geocities, like AOL and others, prospered in a time when the internet was as immature as most of its users.

As both grew up, the need for clunky online communities dropped away and the advent of search engines that actually did a half-way decent job made the process of finding what you wanted a whole lot easier. There was no need for sites like Geocities, and only the loyalty of its fan base kept it going for as long as it did.

6. DEC/Compaq
Iain Thomson: In the late 1990s Compaq chief executive Eckhard Pfeiffer had a problem. His company, which had been in the vanguard of the x86 clone manufacturers, was slipping behind rivals like Dell.

It's times like these that show the true measure of a chief executive. The best of them take control and reorganise the company to be a lean, mean, competitive machine. Michael Dell looks to be having some success with this approach at the moment. The other method is to try and buy market share, and this is what Pfeiffer did.

Compaq went on a buying spree, purchasing vendors like Tandem and luring engineers away from other companies. But it was the $9.6bn that Compaq paid for DEC that raised eyebrows; it was the largest corporate merger in history at the time.

DEC, one of the most prestigious computing names, did have some strong plus points, particularly in the high-end enterprise sphere. Had Pfeiffer known what to do with DEC, he could have been hailed as one of the great leaders of the IT industry. Instead he procrastinated, failed to integrate the company and was eventually forced out in a boardroom coup.

Pfeiffer wasn't the only casualty, however. Saddled with debt, and hit a few years later by the first dotcom slump, Compaq itself became a target for takeover and was absorbed into HP.

Shaun Nichols: One of the recurring themes of this list is a company choosing to solve its own problems by bolting on another large business by way of a mega-deal. You can't often fix your own problems simply by bringing in a new set of products and engineers.

Companies like Cisco and IBM do a nice job of buying smaller and medium-sized firms which are then used to serve as the backbone for new services. Rather than trying to simply bring in a new company to solve a problem, they make ac quisitions with the focus on how those products can expand their own offerings and branch off into new areas.

Lately HP has championed this practice, although the departure of Mark Hurd could slow that effort. In the long run, making smaller acquisitions and using them to grow your own business seems like the better bet than counting on a mega-deal working out. At the very least, the risk factor is much lower.

5. News Corp/MySpace
Shaun Nichols: We mentioned this earlier, but it seems that the absolute worst thing a large firm can do is to buy a smaller company at the peak of its popularity. Fame is fleeting on the internet, and companies that were looking like the next big thing can tank in a matter of months.

Nobody was more familiar with this than the founders of MySpace. The social networking firm had singlehandedly wiped out its predecessor, Friendster. Those execs must have laughed all the way to the bank in 2005, when News Corp shelled out more than half a billion dollars for what was then the social networking king.

Not long after, a little thing called Facebook popped up, poaching users en masse from MySpace. Aside from the odd independent musical act, MySpace is a virtual ghost town these days, and News Corp is left wondering what to do with the property into which it sank so many hundreds of millions of dollars.

One has to wonder whether Facebook will see this and look for a buyer soon. Users have already begun to grumble and, with Twitter looming as a possible threat, the cracks may be starting to show. I'm not sure Mark Zuckerberg has the experience or the humility to cash out while he's way up, however.

Iain Thomson: I suspect you're right, Shaun. Every sign points to Zuckerberg refusing to sell; as he put it himself at a recent press conference: "If I was in this for the money I'd have sold out years ago." We shall see whether a haughty spirit really does come before a fall.

As for the News Corp/MySpace deal, I have to say I wasn't surprised. Rupert Murdoch hasn't been the best judge of what's hot and what's not on the internet and, if his ongoing paywall experiment is anything to go by, nothing much has changed.

Nevertheless, News Corp really took a bath on MySpace. It wasn't just competition from Facebook that did for the site; bad management played a significant role too.

Social networks thus far have followed a pretty predictable path. If they take off they see explosive growth, a plateau and then a steady and inexorable decline.

Facebook doesn't look to have peaked yet and opinion is divided as to whether the site has the critical mass of loyal users to carry on, or whether another next best thing will take its place.

4. Yahoo/Broadcast.com
Iain Thomson: I've a sneaking fondness for this deal, since it gave Mark Cuban an obscene amount of money which he has used to rile some of the biggest names in the business and sporting world.

Cuban and his friends started Broadcast.com with the money he'd made from a previous computing company that got bought by CompuServe. In four years he built it up into a thriving concern that was widely praised as one of the new dotcom success stories, and bigger companies started to sniff around.

Cuban played them with a skill that makes me want to never play poker with the guy, and eventually sold out in 1999 for an eye-watering $5.4bn. It was consummate timing, since the whole dotcom bubble burst less than a year later. What else would you expect from a man who buys his clothes at Tshirt Hell?

Since then Cuban has used his cash to be a professional pain in the arse to the establishment. He funded Grokster's losing battle against the forces of copyright, bought his own sports team and runs a web site devoted to exposing government and business fraud. Sure, Yahoo got seriously hosed on the price it paid, but good things came of it in the end, at least from some perspectives.

Shaun Nichols: I certainly enjoy Mark Cuban's blog and I wouldn't mind seeing him as the owner of the San Francisco 49ers, but if I were ever in a position to acquire one of his companies (never going to happen, but humour me anyways) I would have to respectfully decline.

Cuban is an absolute master of taking a good idea, hyping it into a hot company and then dumping it for a premium. He is a savvy businessman and an even better salesman.

He also seems to have a knack of selling to companies that later flame out. It has nothing to do with the businesses themselves (Compuserve had much bigger problems than the $6m is spent on MicroSolutions in 1990) but Cuban seems to have a knack for finding companies that pay top dollar before losing the lot.

We like to think that the people who run large corporations are all corporate geniuses that make highly intelligent decisions (and they seem to think that too), but it's clear that sometimes even the best business minds can get caught up in the hype and pay way too much for something they don't need that badly.

Unfortunately for Yahoo, its executives have made many, many deals of this sort. The company wasted huge amounts of money on mergers that never worked out and businesses that later had to be shut down.

3. eBay/Skype
Shaun Nichols: It's no secret that Meg Whitman wants to make her business acumen a cornerstone of her California gubernatorial campaign. She would be wise, however, to omit mentioning the deal she made to acquire Skype.

The merger came in 2005, when eBay was booming and many in the industry were infatuated with VoIP. Seeking to build on the emerging system and add new features to push eBay into the larger retail space, Whitman acquired Skype for $2.6bn.

The idea was that Skype would add new communications channels to eBay, allowing customers to connect directly with merchants and discuss items being sold. A smart enough idea with only one real flaw: neither customers nor merchants were particularly interested.

The deal never really went anywhere, and eventually eBay had to eat its losses and spin off Skype.

Iain Thomson: I never really understood the motivation for the deal, and I suspect that it was born not from need but by hype. Remember, this was 2005 and the telecoms industry was collectively quaking in its shoes at the thought of a decades-old business model going the way of the music industry thanks to VoIP.

Possibly the eBay board was overawed at its own skill in the PayPal acquisition, and decided to go one better. PayPal was such a good fit for eBay because it was logical: you need money to buy that limited edition three colour vinyl Aphex Twin album. What you don't need is a way to talk to someone about it.

I think part of the attraction of eBay, indeed much of e-commerce, is not having to talk to people. You find what you want, pay for it with as little interaction as possible and, barring a user comment, that's the end of it.

So eBay took a bath, massively overvalued Skype and Whitman's reputation took a hit. Nevertheless, the company recovered and is now a bit more conservative in what it buys.

2. HP and Compaq
Iain Thomson: You may be aware that Carly Fiorina is running for office in California, with the support of figures like Sarah Palin. I was amazed to see Fiorina espousing her business credentials in the campaign as a reason to elect her.

If the HP/Compaq merger is anything to go by, that's like Simon Cowell citing his diplomatic skills in an interview for the job of UN Secretary General.

Fiorina deserves credit for becoming the first woman to lead a Fortune 20 company, but the merger with Compaq was, in my opinion, disastrous for HP. She went on the acquisition trail early after being appointed and, after a failed bid for EDS, set her sights on Compaq.

It was a long and hard fight, principally with the son of one of HP's founders Walter Hewlett. The decision could have gone either way, given Deutsche Bank's involvement.

Hewlett alleged that a backroom deal had been done to pay off the bank (Deutsche later agreed to bay a $750,000 fine for its conduct during the takeover while admitting no wrongdoing) but Carly got her way and bought Compaq for $25bn.

It was a great day for Fiorina, being head of the biggest computer company in the world, but the deal wiped a quarter off the share price of HP within days and left investors worried.

These worries grew until eventually Fiorina was forced out by the HP board, leaving the company's share price at around half what it was when she took over.

Part of the problem was that, while the grand vision was there, the implementation wasn't and the smartest people left HP and Compaq in search of more pleasant places to work. The R&D division was gutted and engineering became second to sales.

You could argue that HP wouldn't have been the mega-vendor it is today without the mergers, but it's also fair to point out that HP might well have been far more successful on its own, and that the company is a shadow of the innovative centre of excellence that made it such a technology gem.

Shaun Nichols: A while back Iain touched on purchasing market share rather than solving internal issues. The HP/Compaq merger was a textbook case of this.

Many will argue that the deal was a questionable idea executed poorly. Fiorina had already caused a rift with HP's old guard, and the Compaq deal only furthered that. Walter Hewlett famously launched a proxy fight to stop the merger from taking place.

Even after the deal was completed there were stories of integration woes and conflicts that surpass those of your average corporate merger. The economic downturn didn't do much to help matters, nor did the ongoing feud with Dell.

In the meantime, HP's board continued to fall into a state of dysfunction that eventually culminated in a spying scandal. Eventually Mark Hurd was able to right the ship (well, until recently) and the initial goal of turning HP into an all-around IT power was achieved. But it was most certainly an ugly, ugly process.

1. AOL/Time Warner
Shaun Nichols: Many would point to this $164bn merger as the height of the dotcom boom and the financial madness that it wrought.

At the time, the move caused some to wonder whether the two firms hadn't banded together to create a media monopoly that would dominate multiple facets of the economy. It turns out they didn't have much to worry about.

AOL made its fortune from the online infancy of the public. Most consumers had little to no idea on navigating the internet or connecting with others online. AOL's simplified set-up and aggressive marketing tactics helped the company rack up a huge user base early on.

It wasn't long, however, before tens of millions of AOL users came to the conclusion that the walled garden, dial-up ISP service that the company offered just wasn't very good.

Within a couple of years, AOL tanked as a service provider and the new conglomerate was struggling to stay afloat. AOL was soon cast off on its own and forced to rebrand as a web portal.

Facebook take note: unhappy customers will eventually flee, no matter how big you might be right now.

Iain Thomson: You know, I really didn't want to put this one at number one but try as we might we couldn’t think of a bigger corporate merger cock-up than this.

It's possible to see the merger as an enormous success. Possible, that is, if you're Steve Case or any of the other senior AOL managers who saw their net worth go stellar. However, for the other six billion or so people on the planet, it was a roadcrash of epic proportions.

Maybe it was the absurd euphoria of the time. We'd made it through the millennium rollover without a worldwide systems crash, and the mood was high. But for Time Warner executives to agree to value an ailing ISP over and above their own employer was an amazing fail. If I didn't know better I'd suggest someone had slipped Gerry Levin a mickey.

He's since acknowledged it as the worst mistake of his career and it's difficult to disagree. But with the benefit of hindsight it could be argued that such mergers, albeit on slightly more sane terms, were the future, and the deal was ahead of its time. Much, much too far ahead. You can't do a media empire on a 54k modem.