Semi-Organic Growth. Geis George T.

adage goes, you won't improve buoyancy by strapping together two leaky canoes.

      For a corporate business development effort to succeed, it must be connected to a company's core competency and not try to solve a company's fundamental flaw.

      Attempting to move too early into a market can be another source of seriously flawed strategy. When AOL and Time Warner attempted to create the world's first global digital media company, the vision was splendid. The timing was not. Although numerous explanations can be given for what is considered by many to be the worst business combination ever, one prominent reason is a flawed timing strategy. After all, in 2000 broadband capacity was still in its infancy in the United States.

      Overpayment

      Just as numerous factors can lead to flawed M&A strategy, overpayment can spring from many sources. Overestimating synergy is one of most common overpayment drivers.

      Recall that the origin of the word synergy in M&A activity arises from Fred Weston's encounter with Irish coffee on a restaurant drink menu. So perhaps it's not surprising that corporate executives may appear somewhat inebriated in asserting the amount of synergy (particularly revenue synergy) that will arise from transactions. It's no wonder that Wall Street believes and values cost synergies much more than revenue synergies as vehicles for wealth creation. Cost synergies are viewed to be much more in control of an acquirer. Revenue synergies can be quite fanciful.

      Nevertheless, a company can build a reputation for knowing how to generate revenue synergies. Indeed, very few Google deals can be described as driven by cost-reduction synergies. Google's ability to use M&A for semi-organic growth derives from continuous organizational learning relating to how to create revenue synergy that blends existing with newly acquired resources.

      Associated with overestimating synergy is a phenomenon known as the winner's curse.23 Simply stated, the winner's curse implies that in an auction the winner tends to overpay.

      Consider the experiment I've run numerous times in an executive program at UCLA. It's called the pitcher experiment. Put a collection of currency into a water pitcher, with dollar bills, some fives, some tens, and perhaps a twenty-dollar bill visible. Then ask the participants to bid on the contents. The winning bidder will pay the amount bid and will receive, in turn, the contents of the pitcher. Only once in the many times I've run this experiment has the winning bidder benefited. All other bidders fell trap to the winner's curse, paying more for the contents of the pitcher than the value obtained.

      Certainly, the winner's curse is one reason when Warren Buffett described his acquisition criteria this way in Berkshire Hathaway's annual report: “We don't participate in auctions.”

      Integration Pace and Style

      As previously mentioned, the sooner enhanced cash flows from deal cost or revenue synergies are realized, the larger will be their present value. For some deals, this is absolutely appropriate. Furthermore, rapid integration can provide organizational clarity and minimize the uncertainty felt by company stakeholders, from employee to customer. However, for other deals, rapid absorption of the target into the mother ship will be the catalyst for the departure or suboptimal performance of key human assets acquired in the transaction.

      Given the need for tight controls, especially in its defense contacting businesses, as a practice Honeywell Aerospace quickly and efficiently absorbed the people, assets, and systems of the companies it acquired into the corporate parent. But when it discovered a superb center of excellence somewhat hidden in one of its acquisitions, Honeywell realized that it would be a mistake to dismantle the creative talent and distinctive technology the unit possessed. Rightly so, the company not only preserved the unit, but worked hard to nurture and spread its capabilities throughout the entire company.

      1

      See Stinchcombe (1965).

      2

      Boeker (1989).

      3

      Milanov and Fernhaber (2009).

      4

      See, for example, Matt Lynley,

1

See Stinchcombe (1965).

2

Boeker (1989).

3

Milanov and Fernhaber (2009).

4

See, for example, Matt Lynley, “Google's M&A Boss: with Larry Page in Charge, Only a Third of Our Acquisitions Are Busts,” Business Insider (March 6, 2012).

5

Bruner (2004), “Corporate Development as a Strategic Capability: The Approach of GE Power Systems,” Chapter 37. This chapter provides an excellent case study of a systematic approach to M&A.

6

Chuck Philips, “Apple Reportedly in Talks to Buy Universal Music,” Los Angeles Times (April 11, 2013). More likely than not, Steve Jobs feigned acquisition interest in Universal Music and was not interested in completing the purchase of the company.

7

For additional details on Fred Weston and synergy, see my posting on M&A Professor at http://maprofessor.blogspot.com/2009/07/j-fred-weston-origin-of-synergy.html.

8

For a summary of research related to M&A success, see Bauer, Florian, and Matzler (2014).

9

Bruner (2004), p. 63.

10

See Bauer and Matzler (2014) for a discussion of the major threads of M&A performance research.

11

Akbulut and Matsusaka (2010).

12

Netter, Stegemoller, and Wintoki (2011).

13

“Global Financial Advisory Mergers & Acquisitions Rankings H1 2013,” Bloomberg (July 2, 2013).

14

Vipal Monga, “Why Are Takeover Prices Plummeting?” Wall Street Journal (November 26, 2013).

15

See, for example, Netter, et al. (2011).

16

Martynova and Renneborg (2008).

17

See, for example, Fuller, Netter, and Stegemoller (2002).

18

Frick and Torres (2002).

19

Fuller, Netter, and Stegemoller (2002).

20

Akbulut (2013).

21

Herd and McManis (2012).

22

Rajendra S. Sisodia, “A Goofy Deal,” Wall Street Journal (August 4, 1995).

23

Thaler (1988).