Despite gathering storm clouds over Wall Street, global mergers-and-acquisitions activity reached record proportions last year. A string of landscape-shifting deals have been spilling over into the first months of 2008. The worth of worldwide megamergers and acquisitions in industries ranging from automobiles to video games was up 23% last year to $4.8 trillion, according to market researcher Dealogic. Even with a slowing economy, American M&A deals were up 3%, to nearly $1.6 billion, in 2007.
Acquisitions are often efforts to "buy" innovation, folding in a so-called disruptive, or game-changing, technology developed by another firm. Or they represent attempts to bring in a staff known for its consistent and profitable creative output. Indeed, earlier this week, analysts widely interpreted video game giant Electronic Arts' (ERTS) gambit to acquire Take-Two Interactive Software (BusinessWeek.com, 2/25/08) as an attempt to gain control of Take-Two's (TTWO) blockbuster Grand Theft Auto franchise. And Microsoft's (MSFT) recent $44 billion megabid (BusinessWeek.com, 2/1/08) for Yahoo! (YHOO) is a last-ditch hedge against Google (GOOG), which has managed to innovate circles around the two tech titans.
Corporate history, meanwhile, is filled with thousands of additional examples—both successful and ruinous—from Disney's (DIS) heralded 2006 Pixar purchase to the troubled AOL Time Warner (TWX) merger in 2000.
BusinessWeek.com's Matt Vella spoke with Roger Martin, dean of the Rotman School of Management at the University of Toronto and author of The Opposable Mind: How Successful Leaders Win Through Integrative Thinking (Harvard Business School Press, 2007), about the potential pitfalls and rewards of trying to "buy" innovation. An edited excerpt of their conversation follows.
When you think of companies that have been able to successfully acquire innovation, what examples come to mind?
I think what's happened in business intelligence software—where IBM (IBM) bought Cognos and SAP (SAP) bought Business Objects, both last year—has been a recent example of success. Essentially, the acquirers waited for somebody else to innovate, build a business around that, and then absorbed the whole.
Cisco (CSCO), meanwhile, has a corporate strategy of letting a whole bunch of venture capitalists capitalize companies, waiting to see what works and buying up the companies that succeed. In these cases like Cisco's [as well as in other industries], buying is a way to add value. For many commercial products—as opposed to consumer products—scale is an advantage that allows bigger companies to successfully acquire smaller innovators.
So often the discussion centers on technology—software in particular, where products can be melded together somewhat more easily than physical goods—but are there telling examples in other sectors?
Yes, of course. And in a way those are even more interesting. Take Procter & Gamble (PG): Their innovation strategy is "connect and develop," which is not M&A outright necessarily, but is still a method of bringing external innovation into an organization. They believe that invention, the front end of innovation, in other words, is much more randomly distributed than the back end, which is about qualifying, commercializing, and distributing products. In essence, [such an open-innovation tactic is about letting] "the little people invent" and then helping commercialize the innovation through the resources of a much bigger company.
So is there a tendency for larger companies to avoid risky, costly projects that could result in disruptive innovation?
Well, larger organizations drift toward reliability. It can be hard for big corporations to promote invention. You cannot prove in advance that any new idea will work. That's the rule. But if big companies have a culture of reliability, they will insist on proving things ahead of time. What that does is cause them to favor waiting for somebody else to prove something works, to take the risk. In other words, they're willing to pay a pretty big markup for not having to take that risk on themselves.
Microsoft's attempted acquisition of Intuit (INTU) in 1995 might be the very best example of that. They waited for Intuit to build a business and then tried to acquire it to slap its software into Microsoft Office, which sells 10 times the number of copies of software products [than Intuit does].
What about acquisitions that are based more on bringing in a creative group of people, for example, than a particular product or technology? Are the potential pitfalls greater?
I think it is unquestionable that when you're buying a patented technology that is an inanimate object, it's easier to manage that than a case that requires the happiness and satisfaction of talent on an ongoing basis. Many bad things can happen, not the least of which is the talent walks out the door.
A successful acquisition requires a combination of blending new and old cultures together, trying to get them to continue doing what made them successful in the first place, but in a new context. It sounds cliché, but there's a little give and take. The key is offering an acquired team a chance to make their beloved creation bigger and a lot more prominent. In the end, if the people aren't enthusiastic about the potential of a new venture, the deal may not be worth doing.
So how important is clarity of purpose or possible benefit ahead of time? Sometimes, big M&A deals are couched in terms of what the future "could be" if two companies merged, rather than a more sober assessment of the challenges of combining two disparate company cultures. Do corporations often overlook the danger of a "bad marriage"?
I think so. I guess I'm a strategist at heart because what I say is, unless you have a really clear strategy for what you're trying to accomplish—why the duality of the two of us being together: the how, why, and what of what we're going to do—you're likely to mess it up. Having a clear picture in your mind is crucial. From a cultural standpoint, there's great value in thinking of honoring the path each company has come from. Not honoring a company's past is a quick way to get in trouble. It has to be a balance of the past and the future.
The autopsies of so many failed acquisitions point to incompatible cultures, especially when large companies are absorbing smaller ones. What about managing the culture clash?
If you look at reliability and validity-oriented cultures, for folks at larger institutions, innovators can appear dangerous and worrisome. They think perhaps they will not be careful stewards of the corporate charter, etc. But, [those people who are] more cautious have to be made to understand that risk-takers aren't always being profligate or irresponsible. That's the production, the factory out of which innovation comes. Corporate leaders have to emphasize the "why" of such deals, especially after they're done. That's the only way to make sure innovation prevails.