Apples Acquisition of Lala Media Inc - Case Study Example

? Mergers and Acquisition Introduction Driven by changes in the global business environment, organisations constantly seek to expand their markets to achieve economies of scale hence overcome economic barriers. Many organisations have adopted merger and acquisition as a component of their corporate restructuring strategy in order to achieve their objectives (DePamphilis 2008; Johnson & Scholes 2002; Sadler 2003). Daily, the investment bankers at Wall Street would arrange for merger and acquisition transactions that bring together separate companies leading to a larger one (Carey et al. 2001). These deals usually involve even billions of dollars and could dictate the fortunes of the involved parties in subsequent years. According to Roll (2009), between 1996 and 2001, there were over 57,000 alliances and 74,000 acquisitions in the US with a combined value of $12 trillion. Milner (2010) further notes that even in the wake of the 2009 financial depression, the value of top 10 merger and acquisition deals exceeded $1 billion. The basic principle behind these transactions has been the creation of shareholder value according to Sudarsanam (2010) which should be over and above that of the involved companies separately: two companies in one should be more valuable than two companies as separate entities. This rationale proves alluring particularly in hard economic times when stronger companies buy other companies to be more competitive and cost effective while others would be bought when it becomes impossible to survive alone (Schuler & Jackson 2001; Cartwright & Schoenberg 2006). A McKinsey research study indicated that as of June 2005, out of 75 top US companies, both by market capitalisation and revenues, 33 had acquired not less than 30% of their market value through involvement in acquisitions (Roll 2009). It also showed that American CEOs assented to an acquisition every hour daily in the period between 1996 and 2001. With integration of emerging economies of China, Russia, India and Brazil among others, mergers and acquisitions continue to be more pronounced globally. But such strategies should be regulated especially where the combination of case companies could impact overall competition within particular markets (Sadler 2003). In the UK for instance, the body charged with the examination of mergers and acquisition lies in the Office of Fair Trading and the Competition Commission, formerly Monopolies and Mergers Commission (Griffiths & Wall 2004). A merger is a form of strategy where firms, usually of equal magnitude mutually integrate their business operations on a co-equal basis. On the other hand, the acquisition strategy involves a firm buying control rights or 100% stake from another with the intention of making the newly acquired firm a component of its business portfolio (Schuler & Jackson 2001). On completion of the acquisition cycle, the management of the acquiring firm becomes the power answerable to. While Griffiths and Wall (2004) consider acquisition and take-over as the synonyms in business, Hitt, Ireland and Hoskinsson differentiate the two by introducing the aspect of no soliciting or otherwise “unfriendly acquisition” in reference to a take-over (2011, pg.189). Albeit Griffiths and Wall (2004, p.74) claim that mergers and acquisitions account for “50% of the increase in assets and 60% of the increase in industrial concentration,” Carey et al. (2001) argue that there has been minimal research on performance of organisations in post-acquisition period with Hitt et al. (2009) and Weston, Siu and Johnson (2001) arguing that averagely, firms would create little or no value through mergers and acquisitions. Case Study: Apple’s Acquisition of Lala Media Inc. Introduction to the acquisition Apple Inc. is a 1976 Steve Jobs, Ronald Wayne and Steve Wozniak founded US based Multinational Corporation dealing with designing and selling personal computers, computer software and consumer electronics. Among its major hardware products include Macintosh computer line, iPad, iPhone and iPod while its software products include iTunes media browser, Mac Operating Systems, Safari web browser and Logic Studio, a music production tools music suite. With its headquarters in California, US, it had over 357 retail stores spread in over 10 countries and additionally ran an online store as of October 2011 (Apple 2012). Its market capitalisation makes it the world’s largest publicly traded company and also the largest technology company globally by profit and revenue, beating Microsoft and Google combined. Lala Media Inc., currently owned by Apple was founded by Bill Nguyen, a Silicon Valley entrepreneur as an online music store which gave customers the legal capacity to create online music playlists that could be shared, play other Lala members’ full length songs, stream music online, purchase MP3s and buy CDs from its stores (Warren, Reeve & Duchac 2012). Lala launched its invite only website in 2006. It had contracted with popular labels and provided a vast catalogue of albums for customers to stream or purchase. Its home page had over 8 million songs. Apple acquired the digital music company, Lala in 2009 with the aim of exploring new models in selling songs (Edgecliffe & Menn 2009; Graham 2009). According to Madway and Adegoke (2009), iTunes leads in overall retail music service in the US commanding over 70% of digital music sales and offering over 11 million songs despite growing competition for music services from Spotify and Myspace Music. According to Apple’s spokesman, Apple had been buying smaller technology companies (Stone 2009) with Schuler and Jackson (2001) and Weston, Siu and Johnson (2001) indicating search for competitive advantage as the reason for such transactions. Strategy Apple had its iTunes dominate sales of music download in the US and also recorded high performance in various overseas markets (Stone 2009). The company had been rigid to adopt any other form of delivery model despite its various research studies on new models. Seeking to expand its options to other models, the company sought to adopt streaming as a way to propel iTunes to an even higher level. In fact, the company had been widely involved in video streaming research and including music to this was meant to be an advantage. It was during the inception phase as identified by (Carey et al. 2001) that Apple identified the strategy to adopt to realise its vision. Lala Media Inc. provided the avenue to attain this vision as it would enable “people skip having to download music they buy or synchronize their music collection between their computers and mobile devices” (Stone 2009). After all, Apple has been known to acquire smaller companies in search for greater technological capacity. As such, one’s music library would be available online and accessible from a smartphone, PC or any other internet connected mobile devices. According to Madway and Adegoke (2009), Lala provided its 100,000 customers or so the capacity to stream any of its 8 million songs in its catalogue from the Internet. The first access was free and the subsequent unlimited streams would sell for $0.10 per track and a minimum of $0.79 per MP3 download. Lala had also partnered with Google Inc. to allow its users sample songs and get links to purchase such music. It partnered with Facebook to offer its music on the social networking site. Graham (2009) argues that the locker was what Apple found more interesting, providing the capacity to transfer music from one’s hard drive to an online locker which makes the songs available for listening from various other locations, say iPhone. The engineers at Lala had developed easy to use services where users’ hard drives could be scanned leading to creation of a matching online music library hence simpler way of getting music in the cloud. In 2006, the engineers developed CD-swapping service and subsequently made it possible to make copies of one’s music collections in the cloud (Stone 2009). However, this advancement received vast objection from the music industry. In 2008, yet another capacity was developed to enable consumers acquire unlimited streaming rights for $0.10 or download songs each at $0.79 or $0.89. In fact, this acquisition has been largely considered as an acquisition of Lala’s engineers (Graham 2009). This acquisition strategy could be termed as conglomerate in line with the argument by Griffiths and Wall (2004) that such an acquisition would cause the acquiring firm to diversify into products it did not offer previously. Regulatory implications Stone (2009) noted licensing issue in Apple’s acquisition since Lala’s music streaming licences could not be transferred to any acquirer. This meant that Apple had to additionally engage with the music industry in negotiations to find a solution to this albeit the industry had publicly expressed its unease with the dominance of Apple’s download sales. In addition, Lala was only licensed in the US, which meant that Apple had to seek separate licensing agreement in each of its country of operation. Since the terms of service of Lala indicated that the company was not under obligation to update or support the services or sites, Apple could easily back out of the targeted streaming market. It is during feasibility phase as argued by (Angwin 2007) that such factors would be considered. At this stage of merger and acquisition life cycle, the acquiring company identifies any challenges that could hinder the process and finds practical solutions. Valuation Firms have been known to be overvalued in the wake of acquisitions so as to benefit its shareholders (Warren 2012; Weston, Siu, & Johnson 2001). Both Apple and Lala were silent on the values used in the acquisition process probably ascertaining the value discrepancy hypothesis by Griffiths and Wall (2004) who argue that uncertainty and imperfect information would always characterise participating firms. These discrepancies result from different expectations by both firms. Proxy statement suggested an acquisition value of $17 million. But Warner Music Group, WMG received $9 million of in its sale of online music service. Bain Capital affiliates owned 20% stake in Lala and formed the minority stakeholders together with WMG. Therefore, a $17 million sale would imply that these two received more than 50% of proceeds from Lala’s sale. Reports indicating $80 million acquisition price therefore could be more realistic (Edgecliffe & Menn 2009). Lala had raised $35 million funding from WMG, Ignition Partners and Bain Capital Ventures. However, WMG wrote down its $11 million investment in 2009 from the initial $20 million. Financing Financing a merger and acquisition has been a challenge to most companies with Marimuthu (2008) arguing that other than the size of the firm, financial performance stands out as a major determinant of poor performance during the post-acquisition period. Apple is known as the largest technology company globally in its revenue and profit. In the 2011 financial year, the company recorded $25.922 billion in profits and revenue of $108.249 billion (Apple 2012). It is against this financial endowment that the company financed its acquisition of Lala Media Inc. in 2009. Defence tactics Lala was not turning any profits in its ventures and was not to do so in the future probably because people were sceptical with entrusting their music collections to a start-up’s servers whose prospects remained uncertain. One of Lala’s investors, Warner Music, had to write $11 million down its $20 million investment in 2009 due to the company’s non-profitability. Though the company did not have profitability as its immediate goal, it was evident that its shareholders had lost interest in waiting any longer. More so, streaming together with subscription services had generally not gained much traction in the target market. The executives of Lala had been supportive of the company’s acquisition as Stone (2009) reports on an internal source being on record noting that the executives had concluded that they had dim prospects for being profitable in the short run and therefore initiated the discussions with Apple’s vice president dealing with iTunes, Eddy Cue. As such, their low bargaining power ensured a fair bargain with Apple. Implementation Attributes standing out in the available literature as desirable for merging firms include similarity in management and culture and potential assets synergy (Hitt et al. 2009; Carey et al. 2001). The terms complementarily and strategic fit have been used to refer to similarity in the culture and management of organisations that have synergy (Marimuthu 2008). These have been based on performance implications of such strategies. Being a knowledge intensive sector, the Apple Lala acquisition had compatibility as an essential factor as argued by (Warren 2012). Lala was acquired to basically improve on the Apple’s iTune services. Both companies having been involved in similar service provision, integration was not difficult. Apple largely targeted engineers from Lala who would be instrumental in ensuring that Apple avails music to its customers on the Internet without having to download. Employee compatibility thus should have been a major concern in this acquisition. Carey et al. (2001) argue that for smooth transition, employee integration should be attained. Against the argument by DePamphillis (2008) on the need for similarity in age as a component of compatibility, the two companies, having been found in different eras, had an easier acquisition was simpler as Apple had been in the industry for long enough to acquire the needed resources and market share that Lala seemed to lack. However, Apple operating on a global scale and Lala serving only the US market would prove a challenge especially in licensing. Similalry, Apple’s outright interest on Lala’s engineers could see the company sell off other assets of the company which do not align with its strategy. Risks Acquisitions come with a myriad of risks with Sadler (2003) noting that 50% to 70% of acquisitions would lead to lowering of shareholder value instead of causing revenue or cost benefit. Further, the scholar cites the 1995/1996 research studies on 160 acquisitions across 11 industries which showed that only 12% accelerated their growth in the post-acquisition period. Apple had been widely involved in testing functional streaming services. Therefore, there was little need to acquire a whole company to adopt this technology. This could prove to be an unnecessary cost. In fact, Lala’s use of Flash software for wrapping streams which Apple had been averse to use could prove detrimental to its overall strategy (Stone 2009). Apple also exposed itself to the 35% to 45% risk of acquirers not realising any gains for two to three years after acquisition as documented in a research study by Cartwright and Schoenberg (2006). Finally, Lala being an unprofitable company could eat into Apple’s budget further proving to be a liability. This acquisition could follow the trend in its former acquisitions including that of PA Semi model where the company only benefitted from its chip engineers. To contain such risks, Johnson and Scholes (2002) advocate for cost discipline at every level, having processes to handle arising issues efficiently and quick installation of the culture of performance. Conclusion Mergers and acquisitions have been globally used by organisations in pursuit of competitive advantage. While mergers involve co-equal firms, acquisitions encompass smaller companies being purchased by larger ones, but the acquiring company needs to have adequate resources for such a venture. Despite this popularity, there are minimal studies indicating the success of such strategies with more cases proving non-beneficial. The Apple Lala acquisition was successful because Apple had adequate resources to undertake the strategy and that the two firms complemented each other. While Apple sought for the online music streaming technology for its customers, Lala had its engineers to offer the needed expertise. In turn, Lala would benefit by being part of a profitable organisation commanding global market and immense resources. The future remains elusive on how Apple would benefit from this venture but there is certainty in more mergers and acquisitions by many other organisations. References Angwin, D 2007, Mergers and Acquisitions, John Wiley and Sons, New York, NY. Apple 2012, viewed 13 April, 2012 http://www.apple.com Carey, D, Aiello, RJ, Watkins, MD, Eccles, RG & Rappaport, A 2001, Harvard Business Review on Mergers and Acquisitions, Harvard Business School Publishing Corporation, Boston, MA. Cartwright, S & Schoenberg, R 2006, 30 Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities, British Journal of Management, vol. 17, no.S1, 1 -5. DePamphilis, D 2008, Mergers, Acquisitions and Other Restructuring Activities, 4th ed., Academic Press, Burlington, MA. Edgecliffe, A & Menn, J 2009, ‘Apple buys internet music site Lala.com’, Financial Times, 5 December, viewed 13 April 2012, www.ft.com Graham, J 2009, ‘Apple buys Lala, entering the streaming music business’, USA Today, 8 December, viewed 13 April 2012, www.usatoday.com Griffiths, A & Wall, S 2004, Applied Economics, 10th ed., Pearson Education, Essex, England. Hitt, M, King, D, Krishnan, H, Makri, M, Schijven, M, Shimizu, K et al. 2009, Mergers and Acquisitions: Overcoming Pitfalls, Building Synergy and Creating Value, Academy of Management Journal, vol. 52, no. 6. Hitt, MA, Ireland, RD & Hoskinsson, RE 2011, Strategic Management: Competitiveness and Globalisation Concepts, Cengage Learning, Mason, USA. Johnson, G & Scholes, K 2002, Exploring Corporate Strategy, 6th ed., Prentice Hall, New Jersey. Madway, G & Adegoke, Y 2009, ‘Apple Inc has acquired digital music service Lala, as the dominant online music retailer explores new models for selling songs’, Reuters, 5 December, viewed 13 April 2012, www.reuters.com Marimuthu, M 2008, Mergers and Acquisitions: Some Empirical Evidence on Performance, Financial Characteristics and Firm Sustainability, International Journal of Business Management, vol. 3, no. 10, 8 – 15. Milner, N, E 2010, Success in Mergers and Acquisitions: Lessons from M&A Analysis Since 1967, Milner LLP. Roll, M 2009, ‘Merger, acquisition, alliance – Which is the best?’ China Business, Philippines, 1 February, viewed 13 April 2012, http://chinabusinessphilippines.com Sadler, P 2003, Strategic Management, 2nd ed., Kogan Page Ltd., London, UK. Schuler, R & Jackson, S 2001, HR Issues and Activities in Mergers and Acquisitions, European Management Journal, vol. 19, no. 3, 239 – 253. Stone, B 2009, ‘Apple strikes a deal to buy the music start-up Lala’, The New York Times, 4 December, viewed 13 April 2012, www.nytimes.com Sudarsanam, S 2010, Creating Value for Mergers and Acquisitions, 2nd ed., Pearson Education Ltd., Essex, England. Warren, CS, Reeve, JM & Duchac, J 2012, Financial Accounting, Cengage Learning, Mason, USA. Weston, JF, Siu, JA & Johnson, BA 2001, Takeovers, Restructuring and Corporate Governance, 3rd ed., Prentice Hall, New Jersey. Read More