Acquiring companies that make innovative products is good for investors and shareholders. But is it really that good a strategy?
Companies spend over US$ 2 Trillion on Mergers and Acquisitions each year, buying smaller, slimmer, more innovative companies — or those who make products that are innovative and disruptive.
It’s a strategy that certainly sounds good — to the innovators who get acquired, for sure. They laugh all the way to the bank! The acquirers immediately get what their business is lacking. Their market cap jumps overnight. They demonstrate growth through strategic acquisition. They can now charge higher prices, or save a lot of money. Everyone’s happy and looking good!
Except that the concept of ‘buying innovation’ sounds very much like an oxymoron! Y’see, buying is for keeps. However, innovation, by nature is transient. That’s because innovation – whether product or process — quickly becomes business as usual, as it reaches its plateau of productivity, and when it gets copied by the market.
So while the outcome of a successful acquisition can be significant, it begs the question: so…why, then, do over 70% fail?
There are many probable answers. But simply put: it’s because little time has been spent fully answering the questions: (a) why are we really doing this?; And thereafter, (b) we’ve bought them, now what? When the acquired company is an innovator, these questions become very relevant.
More to the point:
1. The CEO – the brain behind the innovation – becomes another employee, or moves away. Imagine a leader who once made all the decisions, now having to seek approvals…!
2. Employees, who were drawn by the energy of the CEO, feel left high and dry – or join their departing boss in the next venture. Let’s be clear, people join start-ups for the vision and the drive of an out-of-the-box thinker. One that will deliver learning, upward mobility and financial gains, quickly and without the red tape of a large corporation.
3. People who’ve been used to a culture of free thinking, start to adapt to the box their new owner allocates to them. It’s always easier to regress! The innovative mind-set starts slowing down.
4. An otherwise friendly environment is now driven by new and stiff policies that impact employee engagement. Particularly the asymmetric compensation and management levels.
5. Duplication and layoffs add to the stress and fear of people at the buyer organization as well as the one acquired.
6. The snob value of being the acquirer creates an unseen caste system. (No explanation required)
Even the most intense (expensive) integration programs cannot resolve all the above consequences of an acquisition. With due respect to all the thinking and the efforts of all involved.
Let’s now take a step back. Before it all began, the innovator was doing great work. Coming up with products that disrupted existing scenarios. That helped companies do their stuff better, faster and cheaper. They were agile and adaptable. Quickly changing track if it made business sense to the CEO. Technology was a way of life. Their prices were transactional and low. They grew fast, riding on scale and optimization. Their clients paid a unit price and possibly a little something for retention.
Sure they were making only a small profit and there were miles to go before anyone got any sleep! Then the acquirer stepped in and everything changed…
Before organizations consider acquiring another entity to look bigger, or fill a portfolio gap, or whatever, it is important to think about the following:
· Buy the innovation – not necessarily the innovator: That’s what outsourcing is all about. By buying just the product, it allows the creators to move ahead, develop improvements, do something new. Buying the innovator, would make it a clone of the acquirer…
· Sponsor unique initiatives that others are working on: Fund nurseries and idea banks at small organizations that are not weighed down by allocated costs.
· Acquire for the core: Only if the target company drives value to the core business does it make a potential target. Eg. A hypermarket chain may consider buying a logistics partner to ensure right-on-time deliveries at their stores. However, buying a travel agency may not be a good idea for them.
· Think of the Culture: Is there a match – at least to some extent – of the culture of the two employee groups? Sharply contrasting culture is a key reason for failed acquisitions!
· Think of the future: After acquiring the innovator, along with the innovation, then what? Is it driving a significant change, or will we have to acquire another innovator soon?
Prima facie, a growth-by-acquisition strategy has its merits – provided leaders can make it work. The moot question is: when milk is available for a dollar a liter, why buy the cow… the hay… the cowherd…?