The following is an excerpt from pages 31-35 of THE SYNERGY SOLUTION: How Companies Win the Mergers & Acquisitions Game (Harvard Business Review Press, 3/15) by Deloitte Partners Mark Sirower & Jeff Weirens.
Amazon: Creating Pathways for Acquisitions
Prepared acquirers don’t look at deals in isolation. They think about portfolios of assets that the deals on their watch list represent, and how those portfolios can be assembled over time to grow their existing core businesses or create new, advantaged businesses based on their organic capabilities. In other words, companies that play to win have prioritized the most promising pathways along which they search for the most important assets in the market. Pathways might be focused on certain products, services, and customer segments, end-market applications, emerging technologies, or different approaches to serving specific customers in ways competitors will have difficulty replicating.
Perhaps no company illustrates development of pathways better than Amazon.
Amazon’s humble beginnings as an early internet book retailer run out of Jeff Bezos’s garage bely the strategic ambitions that made the company the successful behemoth it is today—one that would be barely recognizable to anyone traveling into the future from 1994. While Amazon still sells books, it has expanded into a wide range of seemingly unrelated areas. Through more than 150 transactions (87 full acquisitions), including nearly $20B spent on its top 10 deals, M&A has played a central role in the development of several strategic pathways from e-commerce to the Kindle to Amazon Web Services (AWS) to grocery to Alexa and the connected home.
From its earliest days, Amazon has invested in companies that, on their surface, didn’t seem core to its business but offered potential pathways for future growth. For instance, Amazon acquired a 35 percent stake in Homegrocer.com in 1999 to test the waters in food, but it wasn’t until 2017 that Amazon was fully credited with its commitment to grocery and food retailing, buying Whole Foods for $13.7B. Wall Street analysts often failed to understand this approach: An analyst from Piper Jaffray, for example, commented that endeavors such as AWS were a distraction to profitability.
Some of these forays have yielded full-fledged products or business lines such as the Kindle and AWS. Others served as beachheads into developing technologies or markets, such as artificial intelligence (AI) (e.g., TSO Logic), home automation products (e.g., Echo and Ring), healthcare, media, or retail investments (e.g., India’s Aditya Birla and Witzig).
An aptitude for learning and a penchant for highly strategic acquisitions have enabled Amazon to penetrate and lead many business and consumer categories—and for journalist Brad Stone to call it “the everything store.” Amazon’s original business model of selling books online laid the foundation for its hyper-scalable platform of bringing buyers and sellers together. Since the late 1990s, it has broadened its product focus from books to an extended portfolio of retail goods, supported by both organic growth (e.g., operating other e-commerce platforms such as CDNow) and M&A (e.g., Back to Basics Toys for hard-to-find toys, Woot for electronics and household goods, Quidsi for baby and childcare, Zappos for footwear, and Shopbop for apparel).
Going beyond adding new categories, Amazon embraced its platform, initially as a two-sided online exchange, enrolling external vendors by providing them with a self-serve merchant platform and giving them access to its millions of existing customers who, in return, benefited from access to a wealth of new vendors. These new vendors quickly went beyond the initial rare and out-of-print books categories Amazon had acquired through Bibliofind and Exchange.com, which were closer to its original core business of bookselling.
From there, Amazon has expanded along many pathways— not always successfully but always using a highly strategic lens for acquisitions. Amazon had a blueprint for extension into peripheral segments, sometimes taking a stake in adjacent markets that would bear fruit several years after initial acquisitions and investments.
The development of Kindle, for example, can be traced back to 2004 when Jeff Bezos and Steve Kessel assembled a team of veteran hardware, software, and computing engineers to create the secret Lab126 “skunkworks.” Through acquisitions complementary to their hardware development, especially Mobipocket, an ebook publishing platform accompanied by e-reader software for handheld devices, the Kindle launched barely three years later. The Kindle, beyond just innovation, allowed Amazon to enhance the network effect of its platform, and indeed Amazon customers who owned a Kindle spent over 55 percent more per year ($1,233 vs. $790) than customers who did not own one.
Amazon’s approach to M&A is rooted in several key guiding principles. It first identifies business models and pathways with growth potential and then assesses what capabilities are required to successfully enter those areas. It then looks for companies with the necessary capabilities and assesses its targets based on specific criteria. This means that Amazon is always evaluating dozens of targets rather than being fixated on one deal or being reactive to deals that others are bringing to it.
This is a key point: Amazon has made M&A strategy a core part of its overall growth strategy. Whether through full acquisitions or minority stakes in companies where it sees potential,
Amazon M&A is focused on supporting and relentlessly exploiting its core capabilities of customer experience, lower cost structure, and lower costs for seemingly unlimited choices.
This approach—a customer-centric business model with specific capability needs driving the search for deals that will complement Amazon’s portfolio of existing assets while making a portfolio of bets on the future—has resulted in a dramatic transformation of the company over 25 years from an online book retailer to a multi-sided online marketplace (customers, merchants, and financing sources for merchants and customers) to a top-tier player in a multitude of distinct, yet related, pathways including cloud services, food ecosystems, and connected homes.
One can see these principles at play, along a clear pathway, in Amazon’s development of Alexa, Amazon’s virtual assistant, introduced in 2014 alongside the Echo line of smart speakers. Lab126, Amazon’s internal skunkworks, started the development of the Echo in 2010. Alexa, its main interface, is a voice-activated assistant. To develop it, Amazon had to augment Lab126’s hardware with AI capabilities to enable functions such as text-to-speech, voice recognition, and natural language processing.
Amazon bought Yap in 2011 (a speech-to-text company that provided expertise in translating the spoken word into written language), Evi in 2013 (a UK AI company with software that could process and respond to users’ spoken requests), and Ivona in 2013 (a Polish company with text-to-speech technology that enabled Echo to generate natural voice). As Wired reported, “Initially, Amazon planned to leverage Evi’s technology to build an artificial speech-based book reader. This narrow vision later evolved into an idea to create a new platform that would be powered by a combination of Amazon Web Services (AWS), speech recognition, and high-quality speech synthesis and would be tied to an affordable piece of dedicated hardware, ultimately producing the Alexa-powered Amazon Echo Smart Speaker, which launched in late 2014.”
The Echo offered an entry point into homes everywhere and has allowed Amazon to establish itself as a strong competitor to Apple in home automation—which rapidly became the connected home ecosystem—with a suite of products coming from various acquisitions. Amazon acquired Blink in 2017 (security cameras), Ring in 2018 (intelligent doorbells), and Eero in 2019 (mesh Wi- Fi routers).
Our brief example of Amazon shows how M&A strategy, if done right, allows acquirers to strengthen and extend their business models and leapfrog organic growth scenarios. More important, M&A is an ongoing effort of establishing priorities and making strategic choices of what to develop organically versus what to acquire. That requires being fully aware of the landscape of companies and capabilities in the market and pursuing those assets that will allow the acquirer to delight customers in ways not easily replicated by competitors. Amazon made clear choices of its pathways and the deals it wanted, regularly reviewing a universe of options.
The upshot: Successful M&A is rarely a one-shot effort. Prepared “always on” acquirers can afford to be patient, and don’t necessarily need to be active, because they know the landscape and they know what they want and why.
It takes a tremendous amount of work and time discovering and prioritizing deal candidates, but it yields so many benefits. As one Fortune 50 executive told us: “The more you look, the more you find; the more you look, the more you learn; the more you look, the more you test your strategies.”
The good news: You don’t have to be as impressive as Jeff Bezos and Amazon, but the company’s impressive use of acquisitions to expand beyond its core business and fundamentally transform itself—from online bookseller to AWS and the connected home— should give you a sense of what a clear, “always on” M&A strategy looks like, and how totally different it looks and feels compared to being a reactor.