See here for Part 1.

Back in the day, I did M&A acquisition work for another F100 company, who we will call ‘BigCo W.’ Between 1998-2002, they did over 50 acquisitions. In 2003, they did an autopsy that boiled down the spoils of their acquisitions down to four categories: people, technology, market penetration, and patents. After dissection, results of the autopsy were summarized as follows.

People. In most acquisitions, the key employees of the acquired company are locked up for some duration after the acquisition, typically from 1-4 years. BigCo W then looked at how many of these key employees were still around one month after the lockup period expired. The answer? 25%. One quarter! 75% of the talent that they spent billions acquiring was gone! BigCo W was saddened, to put it nicely.

Market Penetration: BigCo W was the 800lb gorilla in their space, so they needed a StartUp’s market penetration like an Eskimo needs ice. While there are exceptions, such as Facebook and Instagram, most times an incumbent heavyweight does not need the market penetration of a StartUp. BigCo W accumulated no significant market value on 95% of their acquisitions studied.

Patents: IF the patents were good, then BigCoW gained quantifiable value from the acquisition via the patents. Statistically, patents were the most frequent value proposition in the 50+ deals, albeit never remotely justifying the full acquisition price in any deal, and not even close. In some cases, the continuations practice went 20+ family members deep. (I would say Intellectual Property, but in the vast majority of cases, acquirers do not care about the Trademarks and Copyrights from a StartUp.)

Technology: If BigCo W got the people, then they got the tech. Usually software gets re-written in the acquirer’s language or architecture. And the patents, with their written description, were also cited as enabling technology in many cases, and in lieu of the StartUps people in a few instances.

As a result of this study, BigCo W learned that the two most important pieces of their 50+ acquisitions were: people (when they stuck around and contributed), and the patents (when valuable). They have done far fewer acquisitions since then.

So have other F500s. While the multi-billion dollar M&A deals such as YouTube and Skype are sexy and grab wide media attention, the dirty secret is that those huge transactions rarely work, and corporate America has figured that out. One Fortune 500 M&A lead explained the shift away from big deals this way: “We (big companies) know we aren’t good at new ideas or start-ups. We basically suck at building business from zero to $20 million in value. But we think of ourselves as really good at growing values from $20 million to $200 million or more.”

So, at some point in the last decade, big companies went looking for smaller deals, and started avoiding the big ones. While motivated, the mechanisms for incumbent companies to reduce M&A expenditures did not fully materialize until ….

1) Enter a liquid patent market in 2008, and intermediaries. While the market really started in 2003, it did not gain enough momentum to affect M&A until 2008. Since then, companies remain the dominant buying force in the patent transaction space, whether they do the deals directly or through a shell company.

2) Acqui-hires. Much like corporate patent purchasing, acqui-hires were unheard of in 1999. To reflect this growing trend in 2013, a fantastic young outfit called Exitround debuted to help transact StartUp teams. There is now liquidity on the people in a StartUp, too. Not surprisingly, Exitround launched with the support of several big companies.

In other words, the two pieces that were most valuable in an M&A have become liquid, a la carte. 1000 years ago, people owned cows to get milk and steak. Now? Bovine shoppers buy what they need a la carte at a store – because they can. And in amounts that do not spoil. Why buy a cow for $10K when you can buy the milk you want for $3?

And people wonder why M&A numbers plummeted?

Look, soft landings are very important to the tech community in Silicon Valley, which is why I fully support Exitround. So are patent transactions; just ask any solo inventor who has sold his patents after he could not get funding or after his company got crushed by an incumbant.

But large M&As have been the casualty. Prudent business sense for executives at Big Companies dictates not to pay $300M to acquire a company when they can buy the desired pieces for pennies on the dollar. Want the people and not the patents? Just keep your eye on Exitround. Want the patents and not the people? Just wait; the money will dry up if the StartUp is not a smash hit. (And that is without suing the StartUp with patents to financially push them off a cliff.) I don’t fault the executives at big companies for this behavior. Buying StartUp pieces a la carte is just rational consumer behavior in a system that has evolved to permit such behavior.

The point is to educate StartUp Founders on what is happening, and shed some light on these transactions. What is good for the big companies might not be healthy for StartUps, or innovation.