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Mergers and Acquisitions Revisited

We wrote a post last Sept about successful acquisitions. In that post we first struggled with how to actually define a “successful” acquisition. After that we postulated that there were two primary methods of achieving what would in general be considered a successful outcome from an acquisition.

The first method is by overwhelming the acquisition’s culture and turning it into the acquiring culture as fast as possible. I called this the GE-approach because of all the acquisitions I saw while at General Electric during the 90’s, this appeared to be the dominant strategy. The second approach is to leave the acquisition completely alone and let it run autonomously. The only tie to the acquiring company is through financials. Reading an article recently I was shocked but pleased to see that academic research had arrived at similar strategies for successful mergers and acquisitions.

Clayton Christensen, Harvard professor and author of books such as The Innovator’s Dilemma, wrote an article recently in HBR with several other authors about the new M&A playbook. In this article the authors state that studies indicate that mergers and acquisitions fail over 70% of the time. Much has been written and studied about this but from the perspective of attributes of the deal. Christensen et al suggest that the problem isn’t attributes of the deal but that executives fail to match candidate acquisitions to the strategic purpose of the deal.

The article states that there are two reasons to acquire a company, to boost your company’s current performance or to reinvent your business. To extend your business but not fundamentally change how you compete, an executive should buy a company with resources aligned with the current business and fold them in, letting the acquisition eventually die. This is what we described as “overwhelming the acquisition’s culture” or the GE-approach. To reinvent your business, executives should seek companies that have a different business model put resources into it and let it grow. This is what I see as our approach of leaving the acquisition alone letting it continue to grow, perhaps providing financial resources from the parent company.


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Successful Acquisitions

How do you successfully integrate an acquisition? Most academic research on this subject seems to suggest a rational choice perspective which focuses on either strategic fit or organizational fit.

The strategic fit camp emphasizes strategic analysis and negotiation prior to the acquisition whereas the organizational fit research emphasizes the integration of day-to-day operations post acquisition. There has even been recent research on the impact of the acquisition process itself, which makes sense given that first impressions are established during this phase. I’ve had the good fortune of seeing acquisitions from all different perspectives, as the acquired, as the acquiree, as a consultant of the acquiree, etc. I think there are two models that result in successful acquisitions.

First off defining a successful acquisition is tough. Whether or not the acquiring company writes off the purchase cost in a few years might be one way but these write offs can include goodwill which is the amount of the purchase price paid above the value of the target’s identifiable net assets. There are of course accounting rules for testing impairment of goodwill that may require it to be written off. Another way of testing this might be by calculating Return On Investment (ROI) for the cost of the acquisition. A third way of determining success would be whether the acquired company’s product offerings continue 3 or 5 years later. If the acquiring company has discontinued the acquisitions products the purchase might be considered a failure. Lastly, I tend to think of a successful acquisition like Justice Potter Stewart tried to explain what is obscene by saying “I shall not today attempt further to define the kinds of material I understand to be embraced … but I know it when I see it.”

Whether there is a clear definition or I know it when I see it, there appear to be two paths to get there. The first is what I term the GE-approach because of all the acquisitions I saw while at General Electric during the 90’s, this appeared to be the dominant strategy, although I’m sure many other companies have similar methods. It’s simply an approach of overwhelming the acquisition’s culture and turning it into a GE culture as fast as possible. They did this by sending current GE employees into key positions at the acquisition and sending the acquisitions employees to lots of GE training. Within the first year the acquisition was on the GE strategic planning calendar, using GE financial systems, and following GE’s HR guidelines…they were a GE company by that point.

The second approach is to leave the acquisition completely alone and let it run autonomously. The only tie to the acquiring company is through financials. The parent company acts like a board of directors, approving annual budgets and determining the reinvestment ratio. The acquiree is left to their own to manage the day-to-day operations, processes, etc.

If you’ve seen other successful acquisitions handled differently let us know your thoughts.


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The 4 Hour Workweek – Stories from a Life Hack

I wish I had come up with the term “life hack”, but I didn’t.  I first heard it from my partner Mike Fisher who applied it to Tim Ferriss during our discussion of his book “The 4 Hour Work Week”.  Wikipedia indicates that “life hack” is a programmer’s term used to describe what we’ve sometimes called a “simple solution to a complex problem”.  I’ve never heard it used that way before, so in my world the credit will always go to my partner Fish and his definition.   A life hack, says Fish, is a person who takes shortcuts through life to achieve personal goals.

Don’t get me wrong, I’m not jumping on the “I hate Tim Ferriss” bandwagon simply because he is a seemingly overly self promoting, ego centric, self involved individual (fyi – I can’t stand those types of people).  In fact, I think his book has a number of well disguised great points in it.  I also admit that I suffer from a bit of book envy – his has been on the NY Times bestseller list for over a year and the best our book has done is to reach number 256 on the Amazon best seller list for a couple of hours (you should still buy it by the way – it’s calling you – you “need” it)

The first point that I love is that Cash is King, though Tim really doesn’t call it that.  Good job Tim for restating and obfuscating something taught (but ignored) in finance classes the world over.   Way to repackage an important lesson!  Unfortunately, Tim doesn’t seem to understand that if everyone simply goes for the high paying low work “cash today” jobs our last bastion of supremacy – the high tech startup community – would cease to exist.  Name one company that changed the world in terms of products or software that did so without having to sacrifice cash today for a huge shareholder reward tomorrow.  Sure, there are companies like 37 Signals that do an incredible job at balancing their business and personal lives but 37 Signals isn’t going a Microsoft in the’ 80s, an eBay in the ‘90s, or a Google, Facebook or Salesforce in the ‘00s.    It’s a great idea and it fits the needs of many people.  But if absolutely everyone takes the lower risk, high cash route our innovation and startup engines would crater.

I also love Ferriss’ notion of mini-vacations.  Even in the startup community these can be useful to try to keep employees from burning out and keep companies rejuvenated.  Finally, I like his notion of not allowing other people to control your time.  We absolutely all should be looking for simple solutions to complex problems (the Wikipedia definition of life hack) and looking to simplify our lives and eliminate time drains.

My primary concern with Ferriss’ book is the tone and manner of his approach.  At one point he describes his experience winning a kickboxing championship by finding a loophole in the rules that allow him to simply push an opponent out of the ring and win.  He claims that this action is neither immoral nor unethical.  True, they weren’t against the rules – in fact he studied the rules in order to know how to game the system.  In a game whose spirit it is to test skill, he used the rules against the more skilled player.  By “gaming” (note: not “cheating”) the weight system, he put himself at a comparative advantage.  Great – Tim knows how to screw the spirit of the game by using the rules to his advantage.  While I am a huge believer in cutting through bureaucratic red tape and in testing the rules and eliminating or fixing them when they don’t make sense, I would never suggest breaking the spirit of a relationship or system.  There’s an implied consent to abide by the spirit of engagements (such as tournaments or client relationships) regardless of what the “rules” say.   Breaking that spirit doesn’t make you smarter – it just makes you less honorable.  I’ll make a distinction between honor and ethics here.  Honor is abiding by the spirit of a relationship.  Just ask yourself – would you be comfortable doing business with someone like Ferriss, or would you be worried that he might test the limits and boundaries of your contract given his approach to kickboxing?

My next concern with Ferriss’ approach also has to do with spirit; the spirit and tone of his presentation.  He sounds like he is all about himself.  He comes across as a person who loves himself, believes he is a deific gift to mankind and in general reeks of the same self loving stench as some investment bankers (not all of them mind you – but some of the ones with whom I’ve dealt in the past).   As my partner and I have written time and time again – “Leadership Isn’t About You”.  It’s about the team.  If you preach selfishness, as Ferriss does in his book, you by definition can’t be selfless.  If you aren’t selfless in your leadership, you will sub-optimize your results.  This doesn’t mean you won’t be successful – it just means that you won’t reach the maximum potential.

I absolutely believe we should all look for more “life” in our work life balance.  Work from home, get more done in less time, look to bend the rules or eliminate those that don’t make sense, and understand that cash is king.  We should also hope, however, that there are still some enterprising people out there willing to sacrifice to make huge advances.  So too should we pray that there are leaders who understand that a great team led well can equal more than the sum of its individuals and that these leaders are willing to give selflessly in their role.  Finally, I hold out hope that not everyone will violate the spirit of engagements as Tim would seem to preach.  I believe it is this approach and mindset that is at least partially responsible for the corruption that we see in corporate America, the real estate and dot com bubbles and the failure of the banking industry.  Don’t be a life hack.  Work smarter, play more, get more done – but don’t be a blemish on the face of humanity.


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