Over the course of a career, employees may take part in one or two acquisitions. Over the course of my career, I was part of the core team for more than a dozen acquisitions and mergers. Gaining access to such a high volume of transactions and from both sides (acquirer and acquired) provides a unique view of the process. And those numbers do not count the number of deals where due diligence was performed but the transaction ultimately did not proceed forward. Over the course of each transaction, the good, bad, ugly takes a whole new form.
It is no secret that large enterprise providers need a healthy funnel of acquisition targets that lead to deals in order to remain relevant. Smaller startups are driving toward being the next acquisition target. That part of the story is going pretty well. What happens next is where the train falls off the track.
Acquisition vs. internal development
If acquisitions are so problematic, why bother? There are several schools of thought here. One is that internal development may provide a more specific solution to support the business strategy. The challenge is that the company would need to start several initiatives to determine which one will ultimately pan out. This approach takes time, resources and money along with introducing risk. Of the five different research projects, maybe only one makes it. The other four go nowhere.
The alternative is to let startups develop the solutions and ‘test’ the market. Once a solution is proven to succeed, then the company can swoop in and acquire the solution. That seems like a great approach, but is fraught with risk, a premium on the acquisition and ultimately, potential failure.
The process of acquisition
Acquisitions are a hard. It is a form of courtship at a corporate level. There is a sort of dance that companies go through during the courting, due diligence and acquisition process. Each tries to entice the other while trying to fully understand the other party. And like relationships, it may look good on paper, but without good chemistry, the entire thing falls apart.
Goliath learning from David
In most strategies, the acquiring company is the larger and more established of the two. The larger firm looks at ways to ‘integrate’ the smaller one into their collective and portfolio. There are good reasons to take this approach: Scaling, established processes, larger customer footprint, etc. For the smaller acquisition target, these are all enticing traits to immediately gain access to.
The problem is when the smaller organization is made to operate just like the larger one. When the processes and (often) bureaucracy of the larger organization descend on the smaller organization, the innovation process starts to grind to a halt. Staff and customers that were once used to an agile, innovative company are now working with a larger, process-driven organization.
Goliath is taking over David. However, the process needs to work in the other direction. Goliath needs to learn from David to evolve and stay relevant. Yes, this is possible! In my past, we evaluated learning opportunities from the acquisition target. How could we evolve our company to leverage components as part of the process? Essentially, how do we leverage the best of both worlds?
Changing the acquisition strategy
Is it possible to avoiding killing innovation through acquisition? Absolutely! It does not matter whether the acquisition strategy is portfolio driven, gaining market share or customers, acquiring technology or an acqui-hire. All of them can leverage a Goliath-learning-from-David approach.
If the process is not changed, innovation will continue to develop outside the established enterprise providers, get acquired, then stagnate or die. This sequence is playing out over and over again with little change.
There is so much innovation happening right now in the technology industry outside of established enterprise providers. It would be a shame to see it flourish and stagnate without fully realizing it’s potential. By changing the acquisition strategy, innovation has the opportunity to fully develop and mature in a way customers are clamoring for.
If you are the acquirer, consider how to learn from David. If you are the acquisition target, consider how you could help Goliath evolve. If both sides work together, the impact and success of the acquisition will only increase.
Tim: great article from the BTDTVOW (Been There, Did That, Voice of Wisdom)
This big and small problem seems to exist in to some extent in every industry. We could call it the Garage Band phenomenon, esp. since HP started in a garage.
One of the issue that seems hard to manage are the different incentives in each setting. The goal in small companies is a life-and-death struggle to survive. In big companies, it seems to be more “don’t screw up and cost us money and your job”.
With discontinuous rewards, ppl are going to instinctively view Risk differently.
In our view, it’s the different views of Risk that add Risk to the M&A path.
BTW, does everyone really need to get married, anyway?
Why not, just date and collaborate? (aka JV)…
Thanks again for wisdom in great article…
Thanks Jim for the comment! You’re right that not everyone needs to get married. Nor does everyone need an IPO exit. There are many options depending on the business objectives. One size does not fit all.