Apple taught the tech world that going vertical — where a company owns many of the critical technology ingredients that it uses in its products — can result in big payoffs. Products like the iPhone and iPad are made with Apple software, chips, and hardware.
Because Apple succeeded so well with that vertical business model, other companies are following suit. Add to the fact that big tech companies are sitting on a lot of cash and you’ll find that the result is a merger and acquisition boom, said Frank Quattrone (pictured, left), head of merger advice firm Qatalyst Partners.
This is the phenomenon we wrote about on the triumph of vertical models over the horizontal model. In horizontal businesses, each company carves out a certain role. With the PC, Microsoft made the operating system. Intel made the chips. And IBM shipped the computer.
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Now, Apple designs chips that it uses in mobile phones that run its own operating system. Microsoft makes its Xbox 360 hardware and supervises the design of its chips. Intel has broadened beyond chips with its purchase of software firms Wind River Systems and McAfee. And Oracle is designing hardware and chips thanks to its purchase of Sun Microsystems. Acquisitions across industries within the tech sector are now far more likely than ever before.
“In every category, you used to have one or two buyers,” he said. “Now that companies are buying across industries, there are many more potential buyers.”
That means the potential for merger mania is gathering steam. Quattrone talked about this trend in a conversation with venture capitalist Bill Gurley (pictured, right) of Benchmark Capital at the Web 2.0 Summit in San Francisco today.
Quattrone is known for his past jobs at Morgan Stanley, Deutsche Bank, and Credit Suisse First Boston where he played a big role as a financier of Silicon Valley. He helped Cisco, Netscape and Amazon.com go public. But then he got caught in a scandal that took him out of the investment-banking business. He was prosecuted for interfering with a federal investigation into how shares were allocated for IPOs. That led to a long legal struggle. The case was eventually dropped. Quattrone’s name was cleared, but his reputation was tarnished.
Quattrone said that, after his ordeal , that he did serious soul-searching. He thought about doing a private equity fund, shifting the green technology, or philanthropy. But he decided he had the most fun giving advice to tech companies considering merger and acquisition deals. That’s whats gives him a window into today’s M&A environment.