Issue 14.07 - July 2006 Subscribe to WIRED magazine and receive a FREE gift!

Corporate research and development is like exercise: It takes time, energy, and commitment – and it’s absolutely essential to staying fit and alert. But while humans have to put in time on the treadmill to keep that paunch at bay, more and more companies are paying someone else to do the sweaty work. Think of it as R&D; by M&A.;

Corporations are always trying to grow – creating new products, developing new features, expanding into new markets. The old-school approach is to build a big R&D; department. Put smart minds on long leashes, the thinking goes, and perhaps they’ll come up with something innovative. But blue-sky research is a drag on the bottom line. Even the most pedestrian form of R&D;, product development, requires dedicated staff and a fair amount of experimentation.

What a bother! Why not just buy a smaller firm that’s already succeeding in a new market? Cisco long ago adopted this approach – acquiring 107 companies over a 12-year period ending in 2005 – and along the way became one of the most valuable tech companies in the world. The network equipment manufacturer continues to deal its way into new markets.

To expand its presence in the digital living room, Cisco spent $6.9 billion last year– nearly twice its entire R&D; budget – to buy cable-box maker Scientific-Atlanta.

Other Wired 40 companies are also opening their wallets. In 2005, News Corp. entered the social networking fray with a $580 million buyout of MySpace’s parent company. In May of this year, it bought online karaoke player kSolo.com and news aggregator Newroo. eBay last year dropped $2.6 billion on voice-over-IP phenom Skype. Pfizer spent almost $2 billion – more than a quarter of its total 2005 R&D; outlay – to get its hands on Vicuron Pharmaceuticals, a biotech firm with two anti-infectant drugs in FDA trials. In April, Salesforce.com bought Sendia to get its applications to work on handheld devices.

Nowhere has the M&A-as-R;&D; trend been deeper than in online search. Thanks to booming ad revenue, Google and Yahoo have a combined $4.3 billion in cash and equivalents, and they’re not afraid to spend big. In the last 18 months, Google gobbled up Dodgeball, Urchin Software, and Upstartle, gaining entry into mobile social networking, Web analytics tools, and Web-based word processing. Yahoo went on its own Pac-Man-style rampage, swallowing Konfabulator, Webjay, Upcoming.org, Flickr, and del.icio.us. Urp. Now the company offers interface widgets, online playlists, an event-tracking service, and photo- and bookmark-sharing. Not to be outdone, Microsoft extended its domain by acquiring a staggering 24 companies in the last year or so, including bookmarking startup Onfolio.

Small firms, meanwhile, are eager to step up to the auction block. The dream of every office park startup used to be a blockbuster initial public offering. But the market for IPOs has weakened since the bubble burst, and post-Enron regulations have made that exit strategy costly and cumbersome. So the new endgame is acquisition. Companies seem to be forming with the sole intent of selling out to Yahoo, Google, or Microsoft. “The stars are aligning for entrepreneurs,” says Jim Barnett, CEO of Web ad-automation startup Turn, a potential Web 2.0 acquisition target. “It’s a mistake to start a company with the plan to flip it to Google or Yahoo. That said, I have a great deal of respect for both companies and would never rule out anything.” Did you hear that, Mr. Schmidt?

Who’s doing it?

eBay
Voice-over-IP telephony

Pfizer
Biotech drugs

Microsoft
24 deals in 12 months!

Cisco
Cable set-top boxes

- Josh McHugh