Microsoft, Skype and the acquisition integration paradox

Microsoft paid $8.5 billion for Skype and is trying to walk a line between leaving the Internet communications service independent while integrating with its vast array of products.

It's one tough line to walk. The New York Times details Microsoft's integration of Skype so far and the software giant has erred on the side of independence. Skype is developing software for Android, iOS and other services as usual. Ironically, Skype is having issues with Windows Phone.

Borg ships: Best way to integrate acquisitions? Credit: CBS

You see where Microsoft wants to go. Skype for Xbox with cool features. Integration with Windows 8, Lync, Windows Phone and Office can't be too far behind.

The challenge for Microsoft is that it has to preserve what makes Skype great while getting bang for its buck. Microsoft isn't alone with its acquisition and integration paradox. Given the acquisition-happy tech sector these integrations are a huge deal for the vendor as well as technology buyer.

A brief survey of acquisitions indicates that integration appears to be the way to go. Where things get tricky is Web services that have lots of competition and users that aren't locked in.

Consider:

IBM has acquired a bevy of companies and integration rules. The move is simple for Big Blue. Buy a company with products that fill gaps, integrate them quickly and move on. IBM has a sweet spot for its acquisitions---typically companies that are smaller with undisclosed price tags---that offer technologies in Big Blue's hot spots: Cloud, analytics and commerce. IBM plans to spend $20 billion on acquisitions between 2010 and 2015.

Mark Loughridge, CFO of IBM, recently outlined the company's acquisition approach at a JP Morgan investment conference. Loughridge was asked about how IBM picks its targets. He said:

Number one, it's going to be based on the internal strategies of our business. Number two, it's going to be based on our plan for integration over a period of time and introduction to new products, because the key element of that acquisition profile is how it links to our organic investments. These are not just bolt-on acquisitions, these are acquisitions that integrate into those key investment themes.

So if you looked at business analytics as an example, I mean we spent $16 billion, $16 billion since 2005 on business analytics. Now is that just a broad brush, anything that applies to business analytics? No. Six of those key acquisitions were on smarter commerce within that business analytics framework, so they are very well-positioned themes.

If you look at our base strategy in this, our preferred kind of magnitude is in the range of $200 million to $1.5 billion, so we are not looking at big acquisitions nor do we want to communicate that we are looking at big acquisitions. What we found to be more -- the best contribution are acquisitions in that kind of a ballpark that are intellectual property, highly scalable, aligned with a solution that we can manage through 170 countries in something denominated in months then rapidly accelerate it.

We ran an analytical model, eating our own cooking, with research to analyze all of those acquisitions we have done since 2000. So we have done 136 or $36 billion; let me tell you, when you analyze that data you can learn a lot.

We learned content so we can now send those deployment teams out to do due diligence and map the integration. Though we will have a check list of 500 things that you have to manage through we know the key five elements that we have to ace to generate the synergies in that. That gives a big advantage.

Dell's approach has been to add smaller companies---also below that $1.5 billion mark in valuation---and incubate and invest in them until they become units. Boomi is an example. Dell is now working Boomi through its cloud channel. Dell is also buying its way into software, picks up acquisitions almost monthly and is rumored to be hot for Quest Software. The race for Dell is obvious: Grow software to diversify from PCs. Dell integrates somewhat, but it's hardly the Borg from Star Trek.

Apple is more like the Borg. It acquires companies, erases their identities and integrates them into the obviously stronger brand. Good luck finding brand remnants from an acquired company after a year. PA Semiconductor who?

Oracle's approach to its hundreds of acquisitions has been to absorb and integrate. When an acquired company has a lucrative user base, Oracle will choose to support old software and collect the maintenance. Oracle will then integrate roadmaps going forward. Examples of this approach are PeopleSoft and Siebel, two product lines that are supported, but ultimate integrate via Fusion applications. In the cloud, Oracle is also integrating. Notice how the acquisition of RightNow has morphed into an Oracle customer experience pitch when combined with other assets such as Art Technology Group. Sun as a brand is out. Exadata is in.

SAP has acquired and integrated a bevy of companies too---BusinessObjects among the largest---but plans to leave its cloud acquisitions largely independent. SuccessFactors and Ariba will be connected to SAP, but also serve as separate product lines. SAP bought its way into the cloud and wants to keep customers.

The wild card in the integration paradox will be Google and Motorola. Motorola is charged with creating great hardware and software integration. Google has also promised a Motorola firewall so it doesn't compete with partners. Google will also use the Motorola logo. In other words, Google is keeping Motorola as a separate entity in many respects.

Those aforementioned blueprints, however, don't give Microsoft a lot of guidance. Given Microsoft's heritage of trying to integrate everything into Windows, it has to err on the side of keeping Skype independent. What's unclear is whether that approach will work with Skype. Does Microsoft go for the return on investment---integration so Windows looks better to users---or keep users with a more independent Skype? For now, Microsoft is going with the latter since it has to go cross platform. Time will tell if that's the best move.