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Archive for August, 2010

Thoughts on M&A

I’ve been working on some POV’s (points-of-view) applying my experience with Open Innovation to my current position at a management consulting firm.  I’ve left out anything that might be even tenuously connected to firm IP and wanted to share just the more general perspective on M&A as it relates to Open Innovation.  There are actually two pieces here, presented back-to-back (and I’m working on a related third on the need to account for the “whole product” in an Open Innovation strategy):

Executive justifications for mergers and acquisitions (M&A) only seem bound by human creativity.  Consider for a moment the pervasive and amorphous notion of synergies.  When it comes to Product Innovation, a much more precise list can be compiled.  M&A is in its essence an outside-in Open Innovation strategy.  The reason for pursuing such a strategy can be described with the four T’s.

  • Technology The most obvious reason for an M&A is to acquire the specific product or service pertaining to the other company.  Technology here is used loosely to mean the intellectual property constituting said product or service.  A firm can choose to invest in developing its own offering, with all the risks that entails, or it can just buy the proven technology of another firm – along with all the critical systems, processes, experience and relationships described in more detail below.
  • Technique Systems and processes are the key enablers of any business model, and a product or service is nothing without the right business model to commercialize it.  A firm may have a great idea and lack the means to bring it to market.  M&A can be like one-stop-shopping for the tools necessary to unlock the value of a new product or service.
  • Talent If systems and processes are the codified knowledge supporting a business model, then talent, or the people comprising a company, is the tacit knowledge.  Knowhow can create a competitive advantage and barrier to entry, and a company can leap forward along the experience curve with a well executed M&A strategy.
  • Team Technology, technique and talent are about what is inside the company.  True to the principals of Open Innovation, what is outside of the company is equally important as well.  A company’s partners act as a value network, contributing to its business model and supporting its product or service.  M&A provides quick access to that network.

(A fourth might be added, access to new customers or markets, but I would only consider that to fall within the amorphous boundaries of open innovation if a company were interested in cross-selling opportunities associated with those new customers.  So for now, to simplify the discussion, I will set aside that issue.)

When compared to internal R&D, the value of M&A is in the ability to ramp up quickly with the new technology, technique, talent and team. The cost is typically justified with sales projections for the combined company that exceed the sum of the two separately.  So why does the equity value of the acquiring company typically decrease relative to that of the acquired company?

Assuming correct acquisition target selection and valuation, the answer is in the execution.  Take the example of a large, established firm acquiring a smaller, growth company with the aim of crossing the chasm to mass adoption with a hot new product or service.  Few firms are optimized to smoothly and seamlessly integrate acquired companies like this, leaving value from the acquisition unrealized.

Integration teams must start by overcoming the not-invented-here (NIH) mindset.  The work actually begins before the transaction even closes, selling the firm leadership on the value to be had by acquiring the technology, technique, talent and/or team.

The integration team must then convince internal stakeholders of the value of changing the way they do things to support the new business (and everyone knows how hard change can be).  This is true at both the acquired company and the acquiring company, combining “my way” and “your way” to come up with “our way.”

Unfortunately, integration teams tend to be too risk averse in planning, disproportionately focusing on preserving the success of the past rather than positioning the combined company to shape the future.  Maintaining the status quo is not usually seen as a failure, while trying something new that does not work out is.

Integration teams end up making compromises over time that diminish or undermine the value of the acquisition.  Realizing the full value from an outside-in Open Innovation strategy requires a rigorous approach to identifying, designing for and monitoring value from the initial bid to integration completion.

And scene . . . from here on the POV turns into marketing copy for our firm’s services.

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When Google Wave appeared in my Gmail I was thrilled.  I got excited envisioning the paradigm shift to a new communication platform that would disrupt email.  I must have been just like all the developers working on Wave in private alpha.  So why did Google Wave fail and what can we learn?  (Don’t actually expect me to have the definitive answers here.)

Wave was and is a technology in search of an application.  Google tried to suggest applications to users with its YouTube videos and pre-built Wave templates, but adoption never followed.  Which begs the question, who was Google building this for anyway?  To me it seems pretty clear.  Google didn’t have a customer in mind; it was building Wave for itself, Field of Dreams style.   Don’t be fooled by Apple’s example, even when they design for themselves, they are designing with a customer in mind because they all use Macs, iPods, iPhones and iPad in their personal life too.

I’m not faulting Google for its experimentation.  I praise it.  But I also think this is the kind of result you can expect from free.  Requiring your customers to pay even a small amount introduces some discipline and rigor and forces you to develop something that is truly value adding.  You’ll know if it is not because, well, they won’t pay.  This is central to the Customer Development process I learned from Steve Blank (disclaimer: learn <> master).

Doubtless Google learned a lot from this experience, and that’s what makes failures great.  The code lives on, much of it open source, which is encouraging.  Google developers may not have figured out just how to unlock the value in their really neat idea, but someone else still might.  Innovation in the collaboration market is going to be frothy for months and years to come.

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