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Saturday, June 4, 2011

The problem of being acquired

(Cross posted to the Bio Business blog.)

At #IndustryStudies2011 this week in Pittsburgh, I heard an interesting talk about what happens to biotech startups after they are acquired. Panos Desyllas of the University of Manchester presented his study (with two Manchester co-authors) of UK biotech firms acquired 2006-2010 by non-UK companies.

The team studied in depth six acquisitions, interviewing executives from both sides of each transaction and also analyzing five years of trailing patent data. They also traced what happened to the key scientists after the merger by noting their affiliations in subsequent patents.

From this data, they came up with a simple (but useful) 2x2 typology: are the two firms similar in technology and are they similar in capabilities?

The firms might be exploring different technological frontiers. Or the acquired firm might have something that the acquirer does not — or vice versa — whether it be UK marketing by the acquired firm or global marketing by the acquirer. The (plausible) intuition is that complementary acquisition is more likely to create ongoing value than a more directly competing one.

The typology worked as predicted. In the case of acquisitions where both the technology and capabilities overlapped, the buyer closed the acquired company, keeping only an IP expert or two as a temporary consultant to transfer the tacit knowledge.

In discussion during and after the session, we discussed the case where the buyer bought a rival with the sole purpose of killing it. This happens all the time, and in some ways it seems like a special case with an utterly predictable outcome.

The other case I brought up was when the acquisition starts out as being complementary — but the acquired firm gets killed anyway.

In April, Cisco killed the Flip camera line that it bought for $590 million in 2009. Pure Digital founder Jonathan Kaplan was sorry to see Cisco knife his baby rather than put it up for adoption, particularly when it remained profitable.

The other example (from the life sciences industry) was Biogen Idec, billed in 2003 as a merger of equals between two biotech startups, Boston-based Biogen and San Diego-based Idec Pharmaceuticals. However, the failed merger brought the closure of the former Idec operations in San Diego last November, and the layoff of some 300 employees (including a close personal friend).

During Desyllas’ session, we discussed whether the closure was a good thing or a bad thing for the local economy. In true Schumpeterian fashion, the creative destruction makes available skilled talent to the local economy for other ventures. On the other hand, some off the displaced workers may never have a similar opportunity again.

But in the end, we agreed that the pattern proved a familiar point: companies get sold when the owners want to sell — usually when they want liquidity for an illiquid investment. Whether the founder (such as Kaplan) or the venture investors, once the company is sold all bets are off.

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