Technology in 2014, part 2: M&As to Make or Break Companies - Analyst Blog

It was a very busy year as far as mergers and acquisitions are concerned and the number of deals was way too many to mention separately. But some notable splits were also announced that will totally change companies as we knew them.

The biggest deal of the year was WhatsApp, which Facebook (FB) acquired for $19 billion in cash and shares.

WhatsApp Buys Facebook 450 Million Users

At the time of the deal, WhatsApp had 450 million daily active users (DAUs), which built upon Facebook's 550 million (granted that there was most likely a significant overlap). But WhatsApp revolutionized text messaging because for a mere $1 after the first year of using the app, users can send an unlimited number of messages to those on their contact list. So it made great sense for Facebook to bring it into its folds.

Facebook is running the business as a separate unit, but mining user data generated from WhatsApp could further help customer profiling and thereby, its ad serving business. 

The deal directly impacts mobile messaging revenue of telecom operators, many of whom are already under pressure. WhatsApp is expected to add voice call services at some later date, which could further increase this pressure.

Facebook Also Buys Occulus

In March, Facebook spent $2 billion to purchase Occulus, which makes a popular virtual reality (VR) headset called Rift. Its use for this futuristic technology isn't that obvious although CEO Mark Zuckerberg has said that VR is the next big computing platform after mobile, so Facebook needs to have a finger in the pie.

Most of the software development surrounding this headset has been focused on gaming, but Facebook could be thinking of new areas such as classrooms and healthcare. Some users and developers fled the platform for fear that Facebook would be sharing their personal data to advertisers (which is how it generates revenue).

Apple Buys Beats Electronics

Apple (AAPL) strengthened its music business with the acquisition of Beats Electronics for $3 billion in May 2014. Beats not only has a thriving music streaming business and a growing library of music tracks, but also specialized headphones that generated a billion dollars in annual revenue and helped the company report a profit. The business was intended to complement Apple's iRadio music service. Apple announced new headphones from the company in time for the 2014 holiday season.

Amazon Bought Twitch

Amazon (AMZN) outbid Google to acquire gaming platform Twitch for $970 million in cash and roughly another $40 million in retention-related payouts. Twitch has 55 million monthly active users that have grown from a humble 3.2 million just three years ago (in fact it's the fourth largest destination for peak Internet traffic behind Netflix, Google and Apple). Twitch users are usually avid gamers watching live video clips of games for entertainment or to learn new techniques. Therefore the customer base is sticky and growing. Monetization is through both ads and subscriptions.

For Amazon, this was a big opportunity to lure a fast-growing user base in a new vertical to its wares by serving them related ads and offering Prime memberships (that could further increase the “stick” factor). Amazon has a game studio where it is trying to create original gaming content so Twitch could be just the place to market what it makes, among other things.

Lenovo Buy IBM's Server Biz and Google's Motorola

Chinese company Lenovo, the fourth largest smartphone maker in the world, strengthened its position this year with the acquisition of Google's (GOOGL) Motorola for $2.91 billion. The transaction was intended to help the company leverage the brand to grow internationally and it's the reason Lenovo decided to retain the Motorola brand and stock Android OS of Motorola phones. This will probably continue until a cohesive product strategy is devised (Motorola's R&D unit merged with Lenovo's).

Lenovo initially entered the PC market with IBM's Personal Computer division back in 2005. This year saw the addition of IBM's server business for $2.30 billion. Talks between the two have been going on for a while as Lenovo was unwilling to pay the $4-6 billion IBM wanted. Persistently weak results finally forced it to dispose off the decision this year.

Hardware remains the primary focus of the company though that might change over the next few years as it continues to pursue growth.

Priceline Buys OpenTable for $2.6 Billion

OpenTable focuses on getting people seated at the restaurants of their choice. Priceline (PCLN) has proved good at digesting acquisitions in the past: it acquired Active Hotels, booking.com, TravelJigsaw (rental cars) and Agoda.com (China) in the last few years. Restaurant reservation adds a new dimension, but given the history, Priceline is likely to turn it into a success.

Yahoo was a major acquirer in 2014, snapping up 18 companies during the course of the year. The company has focused on smaller targets to build capabilities on the mobile platform and increase its video content and analytics. The largest of these were Brightroll (an online video advertising business), which it acquired for $640 million, Flurry (a mobile analytics business) for $200 million and Bookpad (a document handling business) for $15 million.

Intel (INTC) Built capabilities in wearables technology with the acquisition of Basis Science for around $100 million. It also gave $1.5 billion to Tsinghua Unigroup, a state-funded private equity corporation controlled by Tsinghua University in Beijing, for a 20% stake in two Chinese chip companies owned by the firm. The deal has yet to be approved by the government. The two companies, Spreadtrum Communications and RDA Microelectronics, make chipsets for mobile devices and other consumer electronics products that support 2G, 3G and 4G wireless communications.

The biggest splits announced were those of Hewlett-Packard and eBay.

H-P Separated Hardware and Software & Services Businesses

Hewlett-Packard (HPQ) finally decided to spin off its personal computing and printing business in a tax-free distribution of shares next year, retaining enterprise hardware and services. The hardware business will be called HP Inc, while the rest of the business will be known as Hewlett-Packard Enterprise, so both will continue to benefit from the brand name.

Previous CEO Leo Apothekar almost made this happen back in 2011, but investor uproar ultimately forced him to backtrack. His successor, Meg Whitman, started out in favor of maintaining status quo, but her term involved a ton of cost-cutting actions that still didn't help the company focus on its high-margin opportunities.

Meg Whitman is expected to be CEO of the enterprise business and chairman of the PC business. Dion Weisler is expected to be elevated to CEO of the PC business and independent director Patricia Russo is to chair the enterprise business.

eBay to Separate PayPal from Marketplaces

Online marketplace eBay (EBAY) decided to spin off its payments arm PayPal by the second half of 2015. CEO John Donahoe said that the changing competitive landscape made the split inevitable and the company has been moving in that direction with its Braintree acquisition among other things.

A standalone PayPal will likely be more agile and attract more talent (Dan Schulman, president of the American Express Enterprise Growth Group has agreed to be PayPal CEO). Some people are saying that Apple entering the payments business may have influenced the decision. But this may not be the case considering the measures eBay has taken to fortify PayPal and the fact that Apple Pay only works with the latest Apple devices, which still leaves open a pretty big market.

What is more likely the case is Paypal's own strength is growing, and has been over time. The extent of its dependence on eBay is currently being downplayed by management but its stronger margins indicate that it may now be able to finance its own innovations.

eBay, on the other hand, is going to lose its fastest-growing business, but it will get to keep more of its cash. Whether this opens the door to its acquisition by either Google or Alibaba is something the market will continue to speculate on. Donahoe, of course, says there are no such plans as he readies himself to step down.

Other important announcements included Intel's decision to sell its OnCue TV business, Google's decision to shutter Orkut and IBM's decision to sell its chip-making unit to Globalfoundries.

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