SSRN Id2165444

The role of M&A in market convergence: Amazon, Apple, Google
and Microsoft
Ahreum Hong, Debadutta Bhattacharyya, and George T. Geis
In this paper, we analyze the M&A activity of Amazon, Apple, Google and Microsoft
from 2005-2011 and classify their acquisitions according to a “Media-Internet-
Technology” (“MIT”) scheme. This distinctive classification method is designed to
capture recent market trends within the Media and Information Technology sectors. The
need for constant innovation in post-PC offerings brought about by the rapid uptake of
mobile and cloud technology has prompted these companies to use M&A as a vehicle
to expand their product portfolios and position themselves better to cater to a
converging MIT universe.
Our paper analyzes the impact of M&A activity on revenues for each company at a
segment level and confirms the presence of a statistically significant positive
relationship between the two variables. A reciprocal analysis at a broader group level for
the leading US-based technology companies shows no statistical significance between
overall revenue CAGR and M&A activity over the same time period.
Track: Management
Ahreum Hong USC Annenberg School for Communication and Journalism, Los Angeles, CA
[email protected]
Debadutta Bhattacharyya 715 Gayley Avenue, APT 503, CA 90024 [email protected]
George T. Geis UCLA Anderson Los Angeles, CA 90095-1481 [email protected]
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at: https://ssrn.com/abstract=2165444
https://ssrn.com/abstract=2165444
1. Introduction
Acquisitions have played dramatically different roles in the corporate business
development policies of leading companies such as Apple and Google. In order to
understand the drivers and impact of M&A transactions at a segment level, we have
classified acquisitions carried out by a representative group of companies according to
a distinctive “Media-Internet-Technology” (“MIT”) classification scheme. This
classification scheme is aimed at capturing the recent trends in the Media and
Information Technology sectors which have evolved significantly over the last decade
with a progressive shift towards areas such as mobile and cloud offerings. In order to
respond to these changing dynamics, companies have had to expand beyond their core
focus areas and provide a more integrated set of offerings. This has led to a natural
convergence of the Media, Internet and Technology sectors with significant overlap and
interdependence existing among the different sub-sectors within each of these
segments. Companies historically specializing in one of these sectors have therefore
felt the need to diversify and move into these adjacent industries in an effort to offer a
more complete set of products and services. While some of this has been brought about
by enhanced focus on internal R&D, a major part of this expansion has been through
inorganic growth propelled by a systematic M&A strategy. The paper specifically
analyzes this shift as reflected in the corporate business development activities
engaged in by Amazon, Apple, Google and Microsoft between 2005 and 2011.
As a part of the empirical analysis, we have studied the impact of segmental revenue
growth on the number of M&A transactions executed by the four target companies. This
has then been extended to a broader set of US IT companies and the impact of revenue
growth on M&A policy has been statistically analyzed at a group level. Finally in order to
further investigate the relationship between revenue and M&A, we have looked into the
role of M&A as a key driver of segment revenue for Amazon, Apple, Google and
Microsoft.
2. Literature Review
2a. Convergence
Horrocks (2006) has analyzed the convergence trend that has come about in
technology and in markets, and has suggested the criteria for success and the role of
positioning within this dynamic process. With an increasing trend towards digitalization
of data and a shift towards IP-based networks, the broadcasting and telecommunication
sectors have witnessed significant convergence over the past few years. A report by
OECD (2007) illustrated that the convergence of data and Next Generation Networks
has made the Media, Information and Telecom markets more competitive with respect
to the number of players and the services provided. According to the report,
convergence can be defined across a number of levels such as network, services,
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device, industry/market and regulatory. At each level this affects the interactive media
and broadcasting services, changing customer needs and driving the demand for
greater content from network access operators.
Figure 1. Convergence Model
Source: J. Horrocks, “NGN and Convergence Models, Myths, and Muddle”, OECD NGN
Foresight Forum, 3 October 2006.
2b. The role of M&A – Efficiency, synergy, product diversification
In the face of changing consumer demands as a result of this convergence, companies
have resorted to both internal research and development, as well as to M&A, to move
vertically along the value chain or expand horizontally. Yoffie (1997) demonstrated that
with the coming of age of digital technology, leading IT companies have had to undergo
managerial changes, especially in product and process management, towards more
innovative approaches. In a similar vein, this paper tries to capture the importance of
M&A and its role in bringing about product diversification, efficiency gain, and other
associated synergies within the converging MIT ecosystem.
2c. Key M&A drivers
Depamphilis (2001) suggested a number of different factors that could affect the M&A
strategy of companies. Operating synergies from economies of scale and economies of
scope, strategic realignment and technology changes could be major motivating factors
for carrying out M&A. The need to deliver new products brought about by technological
innovations has often accelerated strategic acquisitions, not all of which have been
successful. For example, eBay’s acquisition of Skype was intended to boost trading on
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its online auction site through the use of internet phone technology, but did not live up to
management expectations.
2d. Impact of M&A activity on company performance
We have also reviewed existing literatures that study the impact of M&A on the
performance of the acquiring firm or the merged entity. Often this analysis looks at
performance metrics before and after the transaction announcement date in order to
make a comparative analysis. This paper however does not aim to focus on the
immediate impact after the announcement but at a more fundamental level involving the
factors affecting the rate of M&A. More specifically we look at revenue growth over a
period of time and try to find if an association exists with the number of transactions
executed during the same period.
A number of references point to the negative impact that M&A strategies have
sometimes had on the acquirer. Jope et al., (2009) showed through an event study
analysis that M&A has resulted in negative shareholder returns in a number of cases.
(However despite the fall in shareholder returns, the M&A strategy of the acquirer could
in each case be justified by the need to reposition itself in the face of dynamic
convergence in the Technology, Media and Telecommunication industries.) Park et al.,
(2002) found that the high transaction costs involved in an M&A process sometimes
outweighed the positive synergy effects resulting in an overall negative impact on
market value. Rahaman (2008) showed that excessively acquisitive firms often
demonstrated unstable market value and operating performance metrics owing to low
liquidity levels and high levels of short-term debt arising from frequent M&A activities.
According to Cheon (2003), within the Information Communication Technology (ICT)
industry, post-M&A integration in case of a merger between a broadcasting and a
telecommunication company becomes especially difficult owing to strong cultural
differences and high system integration cost. Waterman (2000) analyzes the economic
and social effect of the merger of CBS and Viacom which resulted in the second largest
media conglomerate in USA. In this particular case, the media content and network
quality of these companies were affected more by deregulation and policy making rather
than by M&A itself.
There is also some support for the role that M&A can play in business diversification
and the positive impact that it can have on the acquiring firm's valuation levels. Karl and
Servaes (2002) in a study of 1,000 firms from emerging markets showed that diversified
firms on average showed 7% higher valuation than single-segment firms. Arya (2012)
found that for Indian companies, M&A played a crucial role in improving their core
competencies and in enhancing their market value by as much as 28% between 2000
and 2007.
2e. R&D vs. M&A activity
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The final point that this paper addresses is the effect of R&D expenditure on information
technology and its impact on revenue growth vis-a-vis M&A. Bertrand and Zuniga
(2006) analyzed the impact of M&A on R&D investments and found that M&A had a
limited influence on aggregated R&D investments. They also found that domestic and
cross-border M&A had different impacts on R&D activities. Historically the effect of R&D
has been examined at an industry level and country level by the OECD. For our four
target firms, Samuel (2010) conducted a detailed investigation by comparing the R&D
efficiency which was defined as the “average cash flow generated during two years for
one dollar invested in average during the two previous years”. It was noted that while
Microsoft was the biggest investor in R&D, Apple replaced Google as the most efficient
company in 2009.
3. Data and methodology
The MIT classification scheme is a crucial component of our paper as it provides a
distinctive viewpoint, while at the same time accounting for the recent trends and
changing dynamics within the industry. Therefore before classifying the acquisitions of
these companies according to the MIT scheme, we elaborate on the sub-segments that
have been considered under each of these sectors for the purpose of classification.
Media: This segment includes all offerings that directly provide content, either through
online sources or through more traditional means, such as publishing and cable or
satellite broadcasting. With companies like Google and Apple making a foray into
Internet TV and Amazon making available an increasing amount of content on its Kindle
devices, a number of providers are now packaging their content with other offerings and
resorting to a large extent, on the Internet, to reach their end users. While some
revenue in this segment is earned through directly selling content or from membership
fees, for most of these companies a significant portion of the revenue is in fact
generated from advertising. Therefore advertising companies are considered an integral
part of the Media segment.
Internet services and software: As the name suggests, this includes offerings that are
provided to end users only through the online channel. A broad segment, this
encompasses a variety of web-based offerings from e-commerce to social networking,
internet portals to more specific web analytics infrastructure, and from software
supporting search engines to the rapidly growing universe of mobile applications. As the
focus on mobile and cloud technologies has increased, this segment has become a
crucial means to deliver growth in the Media industry and boost associated hardware
and gadget sales.
Technology platform: This segment comprises all electronic consumer gadgets and
related hardware as well as the underlying systems and application software necessary
for the smooth and user-friendly functioning of these products. The increasing
importance of hardware-software integration has prompted a number of traditional
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software companies to acquire targets specializing in component technologies. At the
same time, a large number of start-ups specializing in application software for media
and entertainment, voice recognition, financial services, mapping and imaging, and
travel have been acquired by the larger firms like Amazon, Apple, Google and Microsoft
as they compete with each other to package an increasing number of services within
each product. Companies providing enterprise software, cloud computing technologies,
security software and operating system software for wireless devices also comprise a
major slice of the Technology pie.
For the dataset we have considered all the identifiable M&A transactions carried out by
each of these companies as buyers from 2003 to 2011. These include acquisitions by
each company and / or its subsidiaries, but exclude joint ventures, minority holdings and
business partnerships. While the set of transactions has been principally based on
those reported by Capital IQ, it has also been supplemented by additional information
from industry reports, press articles and company filings. The transactions for each
company have then been assigned to the MIT segments, based on the core focus area
of the target.
Figure 2. Number of M&A transactions in MIT segments by company
Google Apple
35 10
30
8
# of Transactions
25
# of Transactions
20 6
15 4
10
2
5
0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011
Media Segment Internet Segment Media Segment Internet Segment

Techonology Segment Total Segment Techonology Segment Total Segment
Amazon Microsoft
8 25
7
20
# of Transactions
6
# of Transactions
5 15
4
3 10
2
5
1
0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
Media Segment Internet Segment Media Segment Internet Segment
Techonology Segment Total Segment Techonology Segment Total Segment
As a next step we have classified the revenues for each company into a similar MIT
scheme in order to understand how growth in each sector has impacted the M&A
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strategy. Starting with the revenue breakdown in the annual filings, each segment
reported by the company is then allocated proportionately to the Media, Internet
Services and Software and Technology Platform categories based on our
understanding and analysis of the products included in each division. The proportions
assigned to each segment are illustrated in the tables below:
Figure 3. Revenue allocation according to MIT Scheme
Apple - Re ve nue allocation according to MIT M icros oft - Revenue allocation according to M IT
M I T M I T
Desktop 1.00 Window s & Window s Live 0.20 0.80
Portable 1.00 Servers and Tools 1.00
Ipod 1.00 Online Services 1.00
Other music related products and services 0.60 0.30 0.10 Microsoft Business Division 0.20 0.80
iPhone and related products and services 1.00 Entertainment and Device 0.20 0.10 0.70
iPad and related products and services 1.00 Unallocated and other 0.50 0.50
Peripherals and other hardw are 1.00
Softw are, service and other net sales 0.25 0.75
Amazon - Re venue allocation accor ding to MIT Google - Re ve nue allocation according to MIT
M I T M I T
Media 0.75 0.25 Google Website 1.00
Electronics 0.95 0.05 Google Netw ork Website 1.00
Other 0.50 0.50 Other Revenues/ Licensing and other revenues 0.50 0.50
Applying these percentages to the reported revenue for each division, we derived the
“MIT revenue breakdown” for our four main companies. The data for this part of the
analysis is based on fiscal year numbers. Therefore in order to account for the non-
December fiscal year ends of Apple and Microsoft, the number of acquisitions for each
year has been calculated over the reported fiscal year period, to maintain consistency
with the revenue numbers.
Figure 4. MIT segment revenues by company
Google Apple
40000 120000
35000
100000
30000
Revenue ($MN)
Revenue ($MN)
80000
25000
20000 60000
15000 40000
10000
20000
5000
0 0
year 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 2011
M_rev I_rev T_rev M_rev I_rev T_rev
Amazon Microsoft
35000 60000
30000 50000
25000
Revenue ($MN)
Revenue ($MN)
40000
20000
30000
15000
10000 20000
5000 10000
0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011
M_rev I_rev T_rev M_rev I_rev T_rev
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We have also collated data on the revenue and number of M&A transactions as a
buyer, for 31 companies in the US (apart from Apple, Amazon, Google and Microsoft) in
order to study the relationship between M&A and revenue growth at a broader level.
The companies shortlisted for this purpose have been derived from Capital IQ based on
the following criteria:
1. Industry Classification: Information Technology
2. CY 2011 Revenue ($USD mn at historical rate): > 5,000
3. Geographic Locations: United States of America
4. # of Transactions as Buyer: [1/1/2004-12/31/2011] > 9
All revenue and M&A information for these companies have been sourced from Capital
IQ. In order to maintain comparability across companies, the revenue and M&A data
have been calendarized.
4. Illustration of M&A strategy
Before presenting the results of the statistical analysis, we would like to analyze some
of the different motivations behind the M&A strategy of these four companies and how
these helped in expansion of their product portfolio, countered competitive pressure,
aided entry into adjacent business lines and often positioned them for enhanced growth
and profit. We have tried to provide a few representative examples of some of the
above.
1. Expansion of product offerings: Companies have often used M&A as a vehicle
to expand beyond their core focus areas to move into adjacent business lines.
This is not only aimed at gaining economies of scale and enhanced customer
base, but often also used to kill competition.
a. Amazon’s acquisition of Zappos.com, Diapers.com and Soap.com: The
acquisition of online apparel and shoe retailer Zappos was a significant
milestone in converting Amazon from a core media product seller to a
more comprehensive online retailer. The acquisitions of Diapers.com and
Soap.com, which sell baby products and household essentials, was
another major step towards that direction. These transactions also fit their
ongoing strategy of taking over a rapidly-growing competitor within a niche
business area.
2. Ecosystem synergy: M&A synergy where the value of combined enterprises is

expected to exceed the sum of their individual values is a familiar notion.
Revenue synergies are anticipated top-line enhancements that are expected to
come from use of the acquirer’s superior distribution capability, cross-selling of
companies’ products or effective integration across an industry value chain. Cost
synergies, such as head-count reduction from redundant overhead, on the other
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hand are more in control of the acquirer. Synergy can be represented by the
equation V(A + T) > V(A) + V(T), where V(A) is the value of the acquirer and V(T)
is the value of the target. Here we have looked at what can be a potentially richer
form of M&A synergy, given that evidence exists that initiation of a series of
acquisitions as part of a strategic M&A program is associated with value creation.
Ecosystem synergy exists where target acquisitions have synergy not only
directly with the acquirer, but also with each other. In other words, V(A + T1+ T2)
> V(A+ T1) + V(A+ T2), where A stands for the acquirer, and T1 and T2 stand for
distinct targets that have synergies with each other in addition to synergies with
the acquirer.
a. Google’s acquisition of DoubleClick, Admob, InviteMedia and Admeld:
Google has engaged in a series of advertising-related acquisitions that
have helped the company cover the value chain of advertising. With the
acquisition of Admeld in 2011, Google’s vertical integration was complete
with online ads typically starting with the advertiser and going through an
ad agency to a demand side platform (Invite Media), then to ad exchange
(DoubleClick), which also interacts with a supply side platform (Admeld)
before finally reaching users through services such as YouTube (acquired
by Google in 2006). In addition, the AdMob acquisition provided Google
with one of the largest mobile advertising networks. These acquisitions
therefore not only had a significant positive impact on Google’s revenue
model as standalone businesses, but also had a synergistic relationship
with each other, leading to greater cumulative value creation within the
system.
3. Cluster of acquisitions: An oft-practiced M&A strategy for these four companies

has been to make a number of smaller related acquisitions within a particular
space, creating some sort of a “cluster”. This is aimed to help the acquirer
provide a more comprehensive set of offerings and consolidate its position within
a particular product line. While these clusters almost always enhance the
acquirer’s services as a whole, they may be complementary to or independent of
each other and therefore may or may not lead to ecosystem synergy.
a. Microsoft’s acquisition of Calista Technologies, Softricity and Kidaro:
Microsoft acquired Softricity in 2006, a provider of application virtualization
and dynamic streaming technologies, whose virtualization technology
became one of the early components of the Microsoft Desktop
Optimization Pack (MDOP). Continuing with their focus on improving the
user experience within virtualization, Microsoft acquired Calista
Technologies in early 2008 which provided graphics technologies for next-
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generation desktop and presentation virtualization solutions. The Kidaro
acquisition soon after, enhanced Microsft’s enterprise desktop
virtualization offerings, providing the company with backward compatibility
necessary for upgrading to new versions of Windows.
b. Google’s acquisition of On2 Technologies, Widevine Technologies and
Fflick: A corollary purchase to Youtube, On2's acquisition was a stepping
stone in Google's video efforts as they open-sourced On2’s video
compression technology VP8 as a crucial piece of their WebM project.
With this, Google decided to switch Youtube over to WebM for both new
videos as well as its existing catalog. Similar to On2, Widewine was also a
follow-on acquisition within the YouTube-related cluster. Its leading DRM
technology was not only expected to help Google launch Google TV on a
larger number of connected devices but also pave the way for providing
more long-form premium content on YouTube. Finally, the acquisition of
movie recommender, Fflick was believed to have been made to boost
Youtube’s proposed retail movie business.
4. Beating the competition: Each of our target companies started out with a core
focus area of Media, Internet or Technology which had historically served as their
principal revenue generator. However the convergence of these sectors and the
resultant interdependence of their sub-segments prompted the companies to
seek out other opportunities and expand in related business areas. This usually
came in the form of a spurt in M&A activity since they needed to acquire existing
players in the space in order to establish a quick presence in these new fields
and provide a credible challenge to the current market leader. The examples
below illustrate this point.
a. Microsoft’s acquisition of Massive Incorporated, aQuantive, ScreenTonic,
AdECN, YaData, Navic Systems and Rapt: Microsoft made a series of
acquisitions between 2006 and 2008 within advertising in an effort to get a
slice out of the fast-growing online ad revenue pool and combat Google’s
meteoric growth over the same period. These acquisitions brought on the
table a number of capabilities including mobile advertising, in-game
advertising and improved ad targeting. Specifically Microsoft’s acquisition
of aQuantive, which provided tools for better monetization of ad inventory
and helped design ads, was considered as the company’s attempt to
match Google’s acquisition of DoubleClick. (Note: The attempt did not
prove successful as the aQuantive deal was later written off.) The ad
exchange platform acquired through the AdECN transaction was another
effort in that direction.
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b. Apple’s acquisition of Quattro Wireless: Following its rumored failed bid to
acquire Admob, which was finally taken over by Google, Apple announced
the acquisition of Quattro Wireless in 2010, two months after the Admob
deal announcement. Recognizing the importance of gaining a foothold in
the high-growth mobile advertising market, this acquisition provided Apple
with a notable presence in the segment and the ability to try to narrow the
gap with the market leader.
c. Google’s acquisition of Upstartle, Tonic Systems, Zenter, AppJet and
DocVerse: After consolidating its position as the world’s leading search
engine, Google attempted to diversify in a number of different directions
including social networking, office products, local content, mapping and
imaging, among others. While some of these like local content and
mapping further enhanced their search capabilities, a series of
transactions in office products was aimed at improving GoogleDocs and
directly taking on Microsoft at one of its core revenue generators.
Despite opening up new opportunities, spurting revenue growth and positioning the
acquirers to take better advantage of the converged MIT system, M&A strategies have
not always been able to deliver the expected results. Some of the big-ticket acquisitions
that failed to gain traction and have ultimately been closed by the acquirer include
Microsoft’s acquisition of aQuantive (as mentioned above) and AdECN in 2007 and
Google’s acquisition of dMarc Broadcasting in 2006.
5. Hypotheses and results
This research develops a three-step hypothesis to look into the relationship between
M&A activity and revenue (growth). The first step is to explore if revenue growth in the
MIT segments impacts the number of M&A transactions within the corresponding
segment, for Amazon, Apple, Google and Microsoft. This divisional analysis becomes
relevant in the context of the convergence phenomenon as observed in the ICT industry
and classified within our MIT framework. The second step is to analyze if revenue
CAGR over certain periods of time (2005-08 and 2009-11) impacts the number of M&A
transactions over the same period. For this step, the sample data consists of 31 IT
companies in the US in addition to our preliminary set of four companies. This process
also helps in positioning our four target firms within a broader universe of comparable
companies. In order to further investigate the relationship between revenue and M&A,
our paper adopts a two-way approach where we also look at the role of M&A in driving
revenues. This is done in the third step where the empirical analysis is carried out again
at the MIT level. The analyses in this paper gain more significance given that there is
currently limited empirical research on the role of M&A within the converging ICT
industry.
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The following hypotheses are proposed and tested through economic models and
regression analyses. The variables for the hypotheses are described below.
Variable Descriptions
m_rev: Revenue in media segment for each firm in year t

i_rev: Revenue in internet services and software segment for each firm in year t
t_rev: Revenue in technology platform segment for each firm in year t
tot_rev: Actual total revenue for each firm in year t
m_grow: Revenue growth in media segment for each firm in year t from year t-1
i_ grow: Revenue growth in internet services and software segment for each firm in year t from year t-1
t_ grow: Revenue growth in technology platform segment for each firm in year t from year t-1
tot_grow: Actual total revenue growth for each firm in year t from year t-1
m: Number of M&As in media segment in year t
i: Number of M&As in internet services and software segment year t
t: Number of M&As in technology platform segment in year t
o: Number of M&As in other segment in year t
tot: Total number of M&As in year t
rd_per: Research and development expenditure as a percentage of revenue for each firm in year t
5a. Hypothesis 1: For Amazon, Apple, Google and Microsoft, revenue growth in
the MIT segments impacts the number of M&A transactions within each segment
for the same year.
We tested the hypothesis using 3SLS regression and found the results to be statistically
insignificant for all of them.
Table 1. Results for Growth Impact on M&A (Hypothesis 1)
Dependent
/Explanatory M I T TOT
Variable
-1.055543* -0.5203012 1.371608
m_grow ( .6050123) (0.8188163) (.9941124)
1.686812 3.079119 -5.177846

i_grow (1.935237) ( 2.436819) (3.077217)
-1.536744 -1.990831 3.707347

t_grow (1.919387) (2.421655) (3.054661)
6.449678 27.76122* 66.91007* 103.904*

rd_per (6.628743) (13.19471) (13.55914) (28.04799)
-0.6892221
tot_grow
(1.840803)
1.147854 .1151687 -2.077066 -0.7411429
_cons
( .7975746 ) (1.424079) (1.522677) (2.875761)
R-sq 0.1693 0.1547 0.4969 0.3488
chi2 6.82 11.21 28.74 14.66
At 10% Significant Level
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5b. Hypothesis 2: Revenue CAGR (2005-08 and 2009-11) impacts the number of
M&A transactions at a group level for a broad set of 35 companies, including
Amazon, Apple, Google and Microsoft.
This hypothesis was tested by an Ordinary Least Squares (OLS) analysis as well as an
Ordered Logit Analysis which have been described below.
5b(i). Ordered Logit Analysis

 Y as a dependent Variable ta0608 and ta0911
 Number of M&A transactions above 2005-11 average denoted by 2
 Number of M&A transactions at 2005-11 average denoted by 1
 Number of M&A transactions below 2005-11 average denoted by 0
 X as an explanatory variable c0508 and ta0911.
The table below provides further explanation on each variable.
Table 2. Description of Ordered Logit Model

Command with Ordered Logit Y = Dependent Variable X = Explanatory Variable
Ordered with # of transactions during
Ordered Value with CAGR
2005-08 and 2009-11
Avg # of M&A transactions (06-08) 2005-08(ca0508)
(=IF(AO5>$AO$41,2,IF(AO5<$AO$41,-
Avg # of M&A transactions (09-11) Ordered Value with CAGR
1,0)) Current CAGR > Average CAGR
2008-11(ca0811)
with 2005-2008 Year = 1
Ordered Value with Avg # of
OL Model 1) ologit ta0608 c0508 CAGR 2005-08
transactions (06-08)
Ordered Value with Avg # of Ordered Value with CAGR
OL Model 2) ologit ta0608 ca0508
transactions (06-08) 2005-08
Ordered Value with Avg # of
OL Model 3) ologit ta0911 c0811 CAGR 2008-11
transactions (09-11)
Ordered Value with Avg # of Ordered Value with CAGR
OL Model 4) ologit ta0911 ca0811
transactions (09-11) 2008-11
The model chi-square is 1.78 for model 1, 3.67 for model 2, 0.01 for model 3, and 0.30
for model 4 with 1 degree of freedom implying that the results of models 1, 2, 3 and 4
are insignificant. This tells us that the ordered value with respect to average CAGR for
each period has no statistically significant effect on the average number of transactions
in that period. In addition, the model does not pass the test for significance. The positive
coefficient for ca0811 and ca0508 however shows the likelihood that a firm with a higher
CAGR will execute a higher number of M&A transactions.
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Table 3. Result Comparison by Model 1 – 4 (Hypothesis 2)
Number of obs=35 Model 1 Model 2 Model 3 Model 4
LR chi2(1) 1.78 3.67 0.01 0.30
Prob > chi2 0.1815 0.0554 0.9180 0.5821
Coef. (Std. Err.) 4.0592 (3.0563) 0.8146 (0.4542) -0.3354 (3.2672) 0.1893 (0.3443)
z P>|z| 1.33 0.184 1.79 0.073 -0.10 0.918 0.55 0.582
/cut1 1.8433 .65677 2.954686 1.150661 0.37184 0.47473 0.7662 0.7481
/cut2 0.4925 0.4780 0.8879 0.7520
5b(ii). OLS (Ordinary Least Squares) Analysis

This analysis shows a positive relationship between revenue CAGR and the number of
transactions for each time period. However the OLS model results do not pass the test
for significance and the correlation coefficient in each case is very low. Therefore it can
be concluded that although a positive relationship exists between revenue CAGR and
the number of M&As, this relationship cannot be deemed to be statistically significant.
Figure 5. Revenue CAGR (%) vs. # of M&A transactions

Relative positioning of Am azon, Apple, Google and Microsoft 2005-11 Revenue CAGR vs # of M&A (06-11)
# of transactions (06-08) # of transactions (09-11) # of M&A

100
# of M&A
90 GOOG
80
80
70
GOOG
70 MSFT
60
60
50 MSFT
50 y = 39.011x + 20.801
40 R² = 0.0337
40
30 30
GOOG
AMZN
20 20
MSFT
AMZN APPL
10 AMZN APPL 10
APPL 0
0
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Revenue CAGR 05-11 Revenue CAGR
2005-08 Revenue CAGR vs # of M&A (06-08) 2008-11 Revenue CAGR vs # of M&A (09-11)
# of M&A # of M&A
60 80
MSFT 70
50 GOOG
60
40
50
30 40
y = 14.987x + 11.001 GOOG
R² = 0.0193 30 y = 13.898x + 10.965
20
MSFT R² = 0.0159
20
10 AMZN AMZN
10 APPL
APPL
0 0
(10.0%) 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% (10.0%) 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
05-08 Revenue CAGR 08-11 Revenue CAGR
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In order to further explore the relationship between M&A and revenue (growth), we have
done a reciprocal analysis to study the effect of M&A on revenues. Similar to
Hypothesis 1, this has been carried out at a segment level for our four target companies
to get the most granular results.
5c. Hypothesis 3: For Amazon, Apple, Google and Microsoft, the number of M&A
transactions in each of the MIT segments drives revenue in that segment.
The effect of M&A transactions on the revenue of each segment has been analyzed
using the economic model of 3SLS. The advantage of using a 3SLS model is that it
provides more efficient results compared to 2SLS and OLS. A 3SLS model is able to
access all relevant information about the related variable by running multiple equations
simultaneously (Reid, 1996).
The key variables used are described below:
 Y= (m_rev m i t o rd_per)(i_rev m i t o rd_per)(t_rev m i t o rd_per)(tot_rev tot rd_per)
 Endogenous variables: m_rev i_rev t_rev tot_rev
 Exogenous variables: m i t o rd_per tot
H3-1: A positive relationship exists between Media sector revenue and the number of
M&A transactions in that segment.
 The 3SLS regression shows a positive coefficient for the relationship between
revenue and the number of M&A transactions in the Media segment at a 5% level
of significance.
H3-2: A positive relationship exists between Internet sector revenue and the number of
 The relationship between revenue and the number of M&A transactions in the
Internet segment shows a positive coefficient at 5% level of significance. It
should be noted that the number of M&A transactions in the Technology segment
however shows a significant negative association with the Internet sector
revenues.
H3-3: A positive relationship between Technology sector revenue and the number of
 The relationship between revenue and the number of M&A transactions in the
Technology segment shows a positive coefficient at 5% level of significance.
The results from the statistical analyses are detailed in the table below.
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Table 4. Results for M&A Impact on Revenue (Hypothesis 3)
Dependent
/Explanatory M_rev I_rev T_rev TOT_rev
Variable
1390.004** 3278.994** -2908.43
M
(612.34) (1173.699) (2079.237)
712.1583** 1984.474** -1886.961

I
(361.869) (687.5049) (1277.809)
-55.24861 -1031.339** 2823.66**

T
(262.4679) (492.4599) (973.9263)
2838.869 -6365.13* 5525.326
O
(1184.53) (2278.25) (3957.204)
1405.111**
TOT
(690.4296)
114380.3** -104492.7** -447550.7** -443814.7**
rd_per
(25914.23) (43343.52) (127774.2) (150021.4)
-2134.229 7416.16 43030.13** 48497.67**
_cons
(1647.579) (2778.947) (8007.329) (9286.645)
R-sq 0.8658 0.5059 0.5012 0.2855
chi2 154.35 25.80 29.97 8.79
** At 5% Significant Level
* At 10% Significant Level
An interesting aspect of this analysis is that it not only establishes a relationship

between M&A and revenues within the same segment, but also shows how M&A is
associated with revenues in a different division. For example, the number of Technology
transactions positively affects Technology revenues but has a negative association with
Internet or Media segment revenues for the same year. Therefore it can be concluded
that at a segment level, the number of M&A transactions is positively associated with
revenues within the same segment and may have an opposite effect on other segment
revenues.
5d. Hypothesis 4: R&D has a greater positive impact on revenues compared to

the number of M&A transactions.
The empirical result in fact shows R&D to have a negative effect on actual revenues at
a 5% significance level. When regressed along with R&D, the number of M&As however
shows a significant positive coefficient.
This result is consistently observed across the dataset. This seems surprising as
internal R&D is expected to be a major contributor to revenue growth along with M&A,
particularly given the increasing trend towards convergence within the Information
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Technology space. One possible reason for the negative association could be the high
R&D expenditure of companies like Microsoft which saw moderate growth and the low
R&D expenditure of Apple which witnessed exponential growth over the same period. It
therefore appears that high R&D investments do not necessarily translate into higher
revenue growth and even though M&A is positively associated with revenue growth,
there are other factors that influence the actual growth path of each individual company.
6. Conclusion and limitation
M&A has played a key role for companies in developing and providing a broader set of
products and services in the MIT segments. This paper proposes a new MIT
classification scheme and also analyzes the relationship between M&A and revenue
growth and how they impact each other. The financial data for the Media, Internet and
Technology segments used in this study has been aggregated from the firms’ annual
10K filings while the identifiable M&A transactions for each company have been
classified under the MIT scheme based on the target’s core business area. For the
purpose of the empirical study, ordinary least squares regression, 3SLS and an ordered
logit model have been used to determine the relationship between revenue CAGR and
the number of M&As executed. The major results observed from the analyses can be
summarized as follows.
First, the study points to the fact that the ICT industry has been largely defined through
major global players such as Amazon, Apple, Google and Microsoft. These firms have
led the convergence trend within Internet, Media and Technology with respect to
providing content, internet platform and associated hardware and software technology.
M&A has been crucial in developing new products, augmenting existing market share
and in gaining traction in adjacent business areas. The increased competition resulting
from the convergence within the ICT industry has forced companies to step up their
performance and enhance their presence along market value chains. It has provided
additional incentive to further develop their services and move into new territories often
using the M&A channel.
The second key observation is that, over the analysis period, Google engaged in a large
number of M&As and witnessed high revenue growth while Apple also demonstrated a
very high CAGR but with a very limited number of M&A transactions. It is therefore hard
to argue for a causal relationship between the two variables. For the broader set of 35
US companies in the ICT industry, no statistically significant relationship between the
number of M&As and revenue CAGR could be observed, although the model showed a
positive trend. The insignificant result could be a fall-out of a number of outliers which
skewed the dataset. Therefore analyzing this relationship between M&A and revenue
growth through an empirical study at an industry level is complex and would probably
need to factor in the company’s stage of growth, culture of M&A, demand for core
products and expansion policy. Certain specific variables which could provide valuable
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insight into the key M&A drivers include operating metrics, macro variables and sector
growth performance. The current paper does not look at the impact of those variables,
but there is ongoing research in that area.
Even though there does not seem to be any significant relationship between M&A
activity and revenue growth in general, the empirical results do point towards M&A
being associated with higher revenues at a segment level for the four companies under
consideration. This result lends further significance to the classification of transactions
in the ICT industry in terms of the MIT scheme. An analysis of the acquisitions made by
the four global majors in these segments provides a perspective on the sectors
experiencing fastest growth and the most rapid uptake. Understanding these growth
trends therefore becomes a crucial element in forecasting future M&A trends,
particularly in today’s rapidly evolving ICT industry.
Finally, the number of M&As carried out by a company depends on its corporate
development strategy. Google and Apple seem to be positioned at opposite ends of the
spectrum while Amazon and Microsoft have opted for a more moderate strategy. The
study of the MIT ecosystem has shed significant light on the direction of potential future
development. Irrespective of the corporate development policy of the individual firms, it
can be safely assumed that most M&A efforts will be channelized in those directions.
7. List of references
Arya 2012. Impact of M&A on Indian Companies International Journal of Knowledge
and Research in Management and E-Commerce Vol 2, No 2
Cheon, B. S., J.h. Choi, H. Barnett, A. George, J. A. Danowski, and S.H. Joo, 2003. A
Structural Analysis of Media Convergence: Cross-Industry Mergers and
Acquisitions in the Information Industries, Journal of Media Economics,16:3,141
pp. 157
David Waterman 2000. CBS-Viacom and the effects of media mergers: An economic
perspective. Federal Communications Law Journal, 52, 531-550. Wellman, B. ().
Florian Jope, D. Schiereck, F. Zeidler. 2009. Value generation of mergers and
acquisitions in the technology, media and telecommunications industry Journal of
Telecommunications Management. vol. 2, no. 4, pp. 369–386
Gavin Reid. 1996. Small Business Enterprise: An Economic Analysis Psychology Press,
4. 4. pp. 352
J. Horrocks. 2006. NGN and Convergence Models, Myths, and Muddle, OECD NGN
Foresight Forum, 3 October 2006.
Karl and Servaes. 2002. Is corporate diversification beneficial in emerging markets?
Financial Management, 2002 Vol. 31, No. 2 (Summer, 2002), pp. 5-31
Park M.C., D.H. Yang, C.G. Nam, and Y.W. Ha,. 2002. Mergers and Acquisitions in the
Telecommunications Industry: Myths and Reality, ETRI Journal, vol.24, no.1, Feb.,
pp.56-68
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OECD. 2007. Ministers’ meeting on The Future of the Internet Economy 17-18 June
2008, Seoul, Korea
O Bertrand, P Zuniga. 2006. R&D and M&A: Are cross-border M&A different? An
investigation on OECD countries. International Journal of Industrial Organization
Elsevier
OECD. 2007. Ministers’ meeting on The Future of the Internet Economy (17-18 June
2008, Seoul, Korea)
Samuel M. 2010. Google, Microsoft, Apple and Amazon Object: Financial analysis Key
analysis of the competitive advantages for future lead. Online Business
Intelligence
Rahaman 2008. Why Do Firms Fail? : Managerial Acquisitiveness and Corporate
Failure
Yoffie D. 1997. Introduction: CHESS and competing in the age of digital convergence.
In Competing in the Age of Digital Convergence. Yoffie D (ed.). Harvard Business
School Press: Boston.
8. Appendices
Appendix 1. Convergence in the MIT ecosystem
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The role of M&A in market convergence: Amazon, Apple, Google

Ahreum Hong, Debadutta Bhattacharyya, and George T. Geis

Media Segment Internet Segment Media Segment Internet Segment

M_rev I_rev T_rev M_rev I_rev T_rev

M_rev I_rev T_rev M_rev I_rev T_rev

2. Ecosystem synergy: M&A synergy where the value of combined enterprises is

3. Cluster of acquisitions: An oft-practiced M&A strategy for these four companies

m_rev: Revenue in media segment for each firm in year t

1.686812 3.079119 -5.177846

-1.536744 -1.990831 3.707347

6.449678 27.76122* 66.91007* 103.904*

5b(i). Ordered Logit Analysis

The table below provides further explanation on each variable.

Table 2. Description of Ordered Logit Model

5b(ii). OLS (Ordinary Least Squares) Analysis

Figure 5. Revenue CAGR (%) vs. # of M&A transactions

# of transactions (06-08) # of transactions (09-11) # of M&A

712.1583** 1984.474** -1886.961

-55.24861 -1031.339** 2823.66**

An interesting aspect of this analysis is that it not only establishes a relationship

5d. Hypothesis 4: R&D has a greater positive impact on revenues compared to

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712.1583 1984.474 -1886.961

-55.24861 -1031.339 2823.66