5 of the Worst Tech Acquisitions From the Past 5 Years

With Hewlett-Packard (NYSE: HPQ  ) recently announcing the writedown of its Autonomy acquisition just over a year after that deal closed (and after a separate impairment last quarter), it would seem that a recounting of some of the worst tech acquisitions in recent memory is in order. The following weren't plagued by allegations of fraud and cooked books like the Autonomy deal -- just plain poor decision making and simply overpaying were the culprits here.

When acquisitions attack!
Merger and acquisition activity is important for companies to tap into new areas of growth and potentially realize cost-saving synergies in the pursuit of profit maximization. Trouble can arise if an acquirer pays too much for a target and things don't pan out as hoped. In those cases, investors will eventually face painful goodwill and intangible asset accounting charges.

For this list, I looked at companies that announced impairments within the past five years (regardless of when the deal was initially announced). Then I considered a number of factors including the magnitude of the premium paid (for publicly traded companies), how large of impairment was recognized relative to the purchase price, and how quickly management realized it just wasn't meant to be.

Zynga and OMGPOP
Social gamer Zynga (NASDAQ: ZNGA  ) has had quite the short life in the public fast lane. One of the biggest challenges facing the company has been to diversify away from Facebook's (NASDAQ: FB  ) platform and toward mobile ones like Apple (NASDAQ: AAPL  ) iOS and Google (NASDAQ: GOOGL  ) Android. The company's acquisition of OMGPOP was a major dud:

Acquisition Price

$183.1 million

Goodwill and Intangible Assets Recorded

$137.3 million

Impairment and Restructuring Charges Recognized

$95.5 million

Percentage of Acquisition Price Impaired

52%

Time Elapsed Before Recognized

7 months

Claim to Fame

That was quick!

Source: SEC filings.

OMGPOP had but a single popular title, its Pictionary knockoff Draw Something. Zynga saw social potential in the game that no one else did, so it snapped up the company for a lofty $183.1 million. Interest in the game quickly faded and Zynga was forced to impair 52% of its total acquisition price just seven months after the deal closed.

Cisco and Pure Digital
Networking giant Cisco (NASDAQ: CSCO  ) has always been out of touch with the consumer market, and its 2009 acquisition of Pure Digital is the embodiment of that. Pure Digital was the maker of the then-popular Flip handheld video cameras.

Acquisition Price

$590 million

Goodwill and Intangible Assets Recorded

$490 million

Impairment and Restructuring Charges Recognized

$262 million

Percentage of Acquisition Price Impaired

44%

Time Elapsed Before Recognized

2 years, 1 month

Claim to Fame

That was misguided!

Sources: Cisco, SEC filings, and The Wall Street Journal.

About two years later, Cisco decided to axe the division altogether instead of sell it to recoup some of its money. It was also bad timing since photo and video performance capabilities built into mobile devices were dramatically improving around this time, to the point of disrupting stand-alone cameras.

Microsoft and aQuantive
Back in 2007 when Microsoft (NASDAQ: MSFT  ) had high hopes of challenging Google in online ads, it decided to pick up aQuantive for a mind-boggling 85% premium. Google had just acquired DoubleClick and Microsoft clearly felt it needed to step up.

Acquisition Price

$5.9 billion

Premium Paid

85%

Goodwill and Intangible Assets Recorded

$6.2 billion

Impairment and Restructuring Charges Recognized

$6.2 billion

Percentage of Acquisition Price Impaired

105%

Time Elapsed Before Recognized

5 years, 3 months

Claim to Fame

That was all of it!

Sources: SEC filings and The Wall Street Journal.

If you're wondering why Microsoft initially recorded more goodwill and intangibles than the total purchase price, it's because it also took on about $1.1 billion in liabilities as part of the deal, but its net cost was $5.9 billion that was paid in cash. Microsoft finally admitted aQuantive didn't boost sales like it had hoped.

HP and Palm
Former Hewlett-Packard (NYSE: HPQ  ) CEO Mark Hurd thought that buying struggling Palm would be a good way to tap into mobile device growth. HP would take over the webOS platform that had gotten a lukewarm reception.

Acquisition Price

$1.8 billion

Premium Paid

23%

Goodwill and Intangible Assets Recorded

$1.3 billion

Impairment and Restructuring Charges Recognized

$3.3 billion

Percentage of Acquisition Price Impaired

183%

Time Elapsed Before Recognized

1 year, 7 months

Claim to Fame

That was embarrassing!

Sources: SEC filings and The Wall Street Journal.

After Hurd was ousted in a high-profile sexual harassment scandal, his successor, Leo Apotheker, didn't agree with Hurd's vision for Palm. A year later he would axe the webOS hardware business and set up the aforementioned Autonomy debacle. Apotheker was quickly shown the door and Meg Whitman was named CEO just in time to recognize the $3.3 billion in charges related to killing webOS.

Sprint and Nextel
This one was more of a merger than an acquisition, but it was quite a whopper. Sprint Nextel (NYSE: S  ) was formed in 2004 when the two joined forces in a $37.8 billion deal that was expected to generate billions in synergies.

Acquisition Price

$37.8 billion

Goodwill and Intangible Assets Recorded

$26 billion

Impairment and Restructuring Charges Recognized

$29.7 billion

Percentage of Acquisition Price Impaired

79%

Time Elapsed Before Recognized

3 years, 3 months

Claim to Fame

That's a ton of money!

Sources: Sprint and SEC filings.

The merger has proven to be an absolute disaster in the years since. Even today, Sprint is the financially weakest of the top three carriers and it continues to wind down Nextel's legacy iDEN network.

Back to the future
Several notable tech deals in recent memory stand out as potential impairment candidates in the near future.

There was Microsoft's $8.6 billion acquisition of Skype, overpaying even more than eBay (NASDAQ: EBAY  ) did and adding $8.7 billion in goodwill and intangibles. Google's $12.4 billion purchase of Motorola only generated $2.6 billion of goodwill, with most of the rest comprised of patents. Perhaps Facebook's $1 billion buy of Instagram will come back to bite, since Instagram has no revenue and included $572 million in goodwill.

Who will be next to eat a past acquisition with a fork, knife, and side of tears?

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Read/Post Comments (17) | Recommend This Article (77)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 23, 2012, at 8:50 PM, aleax wrote:

    Maybe you're not counting the AOL/Time Warner merger as not being purely "tech", but the write-off of $100B from that one remains I believe the biggest so I personally would have mentioned it -- makes Sprint/Nextel look cheap in comparison!-)

  • Report this Comment On November 23, 2012, at 9:20 PM, sawchain wrote:

    Google + Motorola Mobility has to be one of the dumbest business decisions ever. First, an enormous amount of hubris is required to assume managing hardware is in any way similar to managing software. Hardware requires an entirely different set of skills and expertise than software. Second, spending a full year's worth of profits to buy an *unprofitable* business is suicidal. No amount of synergy will cause a failing business to turn a profit. Further, it's more likely that the unprofitable business will act as an anchor and reduce the profitability of the company overall. Several quarters of earnings reports have proven this true. Those guys at the top of Google are far from genius. They're fools who have fallen aimlessly into their situation.

  • Report this Comment On November 23, 2012, at 10:00 PM, TMFNewCow wrote:

    Aleax, I focused on the past 5 years in part to omit AOL + Time Warner, just because most investors have probably heard enough of that one!

    -- Evan

  • Report this Comment On November 25, 2012, at 8:36 AM, Leo120 wrote:

    Good article, thanks Evan.

    Check Merjerz.com, it's fighting the chronic M&A failures of which this article details some prominent examples. It's doing for M&A what the Fool does for investing - makes good information independent, transparent and meritocratic!

  • Report this Comment On November 25, 2012, at 9:24 PM, SuntanIronMan wrote:

    I think it might be a little bit too early to say that Skype was one of the worst tech acquisitions from the past 5 years.

    Did Microsoft overpay for Skype? Definitely. But unlike the other awful acquisitions you mentioned (that I completely agree with), Microsoft still has the opportunity to do something with Skype to make that overpriced acquisition worth it to shareholders.

  • Report this Comment On November 25, 2012, at 9:26 PM, SuntanIronMan wrote:

    Oh, never mind. You were saying that Microsoft's acquisition of Skype was a potential candidate in the future. My mistake. Well with that being the case, I completely agree with you about everything in this article then, haha.

  • Report this Comment On November 26, 2012, at 7:34 AM, ravens9111 wrote:

    The only group of people benefiting from any buyout or M&A are the investment bankers and the shareholders whom are lucky enough to be holding shares of the acquired company before the announcement. The shareholders of the acquirer almost always get screwed.

  • Report this Comment On November 26, 2012, at 5:55 PM, pancratski wrote:

    Aleax - Title said last 5 years... How much can they wirte off on thier tax bill?

  • Report this Comment On November 26, 2012, at 5:58 PM, pancratski wrote:

    ...

  • Report this Comment On November 26, 2012, at 6:05 PM, aperture1 wrote:

    What would the 5 best acquisitions be?

  • Report this Comment On November 27, 2012, at 10:04 AM, snapperreef wrote:

    Thanks for an informative article. It just goes to show what businesses of all stripes find out the hard way.

    You can't take poor land like beach sand and ever add enough fertilizer to make it produce like Iowa corn land.

  • Report this Comment On November 27, 2012, at 4:23 PM, chris293 wrote:

    This is a good reminder that a lot of the companies that are being brought are really may be aquired just for some idea or person therefore

    the major write downs of the monies that more than likely made a number of people secure. On the other hand, ego and greed go with empire building and there are always bad decisions made unless there are some strict rules or quidelines to make sure that there are no underhanded goings on.

    Trust and honesty with the public can be restore by the business world, labor unions, and the Congress/government by being more open with us. Give us the simple facts, don't try to snow us with reams of stuff like some overly emotional talking heads.

    Again, thanks for this reminder.

  • Report this Comment On November 30, 2012, at 10:52 AM, Exadyne wrote:

    When I saw this article, I immediately thought Sprint/Nextel. Then I remembered that is older than 5 years. Then I look at the article and it is there anyway.

    Maybe you should change the article title to acquisitions of the last 10 years?

  • Report this Comment On November 30, 2012, at 11:09 AM, whyaduck1128 wrote:

    I'm the first to admit I don't understand valuations in the tech sector. Apparently, there are lots of people in the sector who don't understand valuations, either. The difference is that I tend to avoid it, while they squander billions of shareholders' money on it.

    I'd love to confront the CEOs and other bright boys and girls responsible for fiascos like these and ask them, "So, who's the stupid one here?"

  • Report this Comment On November 30, 2012, at 1:51 PM, masterN17 wrote:

    I'd also like to know what the 5 best acquisitions would be. I could have named these worst ones easily, but that doesn't mean I know how to spot a good one!

  • Report this Comment On November 30, 2012, at 2:24 PM, larrrup wrote:

    Like aleax I too was looking for you to call out Time Warner. I was working for TW at the time and saw the merger as a pending train wreck. It was engineered by Levin who was in some kind of mental funk after his gay son was murdered.

    They put the AOL weenie Case, in charge of the company. He knew nothing about entertainment. TW was books, film, magazines, music and cable.

    AOl prusued the merger because they saw the handwriting on the wall as far as dial up. They initally approaced TW to be put on the system and they said "ok how much are you going to pay us for our bandwidth?" They wanted free when this didn't work they tried to force TW to give them acess through the franchising process and government on the west coast. After the courts ruled against them they then wanted to merge.

    As a result TW stock went sideways for almost a decade. Ted Turner (the largst stockholder) was denied a seat on the board and after the stock drifted down to as low as $10 per share he gave up and sold out.

  • Report this Comment On December 03, 2012, at 3:58 PM, TzingerToo wrote:

    My experience with M&A deals leads me to say the most profitable ones are the unfriendly acquisitions.

    The friendly ones always price in too much goodwill. It seems to take at least 3 years and more often 5 years before the merger is profitable.

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