December 3, 2013

On what was close to the fourth anniversary of its $207 million purchase of voice-over-IP (VoIP) provider, Spanish telcommunications giant Telefonica has announced that it is shuttering the service. Product innovation at Jajah had been crawlingly slow under Telefonica’s ownership, and subscriber growth and usage had mirrored that. Telefonica’s focus had increasingly been directed towards mobile VoIP applications such as Tu Go and Global Friends. (It is noteworthy that this had happened despite the fact that Jajah had developed a mobile application with a Facebook calling capability).

Silicon Valley-based Jajah was once viewed as an up-and-comer. Star-power venture capitalist Sequoia was a backer, as were the VC arms of Intel and Deutsche Telekom. Jajah was perceived by some as having an easier and more intuitive technology than Skype, and (in the months after Google acquired Jajah’s rival Gizmo5) Microsoft and Cisco were apparently lined up for a bidding war.

Telefonica proved to be the buyer. With the deal it acquired 15 million users (not the 25 million some external observers had imagined). The Telefonica deal was structured in a way that worked for the VCs (they had invested $33 million, presumably for a majority position) but not for the Israel-based engineering team, which felt under-compensated and cut adrift from the rest of the company in California. Perhaps the technology did not develop as hoped or perhaps Telefonica proved what many intuitively understand: that massive incumbents don’t do “disruption” particularly well.

The rest, as they say, is a history of coming in third (or fourth, or fifth) in technology. Microsoft subsequently acquired Skype and committed resources to the technology. Despite having a massive customer base and the balance sheet to help an acquisition, Telefonica allowed Jajah to languish. “I will Skype you” may well be up for contention as an entry in a modern lexicography; “I will Jajah you” will not.

Our suspicion is that this could be a case of an M&A effort where the highly logical, 30,000 foot scenario underpinning the deal was not followed up by appropriate capital- and resourse- allocation decisions in the buyer’s strategic planning exercise. The history of technology deals that fail is also a history of acquisitions that are plugged into a corporation where strategic planning is based on last year’s budgets seasoned with a heavy dose of inertia, and where new and disruptive technologies and business units therefore sit idly as the market moves on.

In our experience acquisitions of disruptive technology should be accompanied not only by thorough due diligence, but also by a robust analysis of what development resources will be required and how this may affect the strategic planning exercise. This can be driven by a strong corporate centre; it is less likely to work in a corporation characterised by baronial divisional structures.