Inorganic growth

Phanish Puranam

Strategy & International Management

London Business School

Acquisitions Are Like Marriages

Thus, after decades of research the overwhelming conclusion must be that M&A activity, on average, does not positively contribute to an acquiring firms performance.

Acquisitions

1993-94

1995

1996

1997

1998

1999

Innovation: from invention to product

Product development

Exploration

Validation

Scale-up

Institutionalization

Commercialization

Entrepreneurial firms

Innovation: from invention to product

Product development

Exploration

Validation

Scale-up

Institutionalization

Commercialization

Established firms

Innovation: from invention to product

Product development

Exploration

Validation

Scale-up

Institutionalization

Commercialization

David & Goliath partnerships

David and Goliath technology partnerships

David

Goliath

Product development Innovative culture Talent Proven technology Continued product development

Commercialization Development process, scale up, approvals, design for manufacture Distribution Branding, sales forces, distribution channels

Entering new businesses/scaling up current ones

Inorganic Growth
Strategic partnerships

Organic Growth
New product development, Internal corporate ventures

Non-equity alliances

Acquisitions

Equity alliances

Organic (Internal) vs. Inorganic (External) development

Need for speed (favours external development- internal development is

slow and uncertain)

Availability of related assets within the company to build on (favours

internal development)

Market maturity (the absence of prospective partners forces internal

growth)

Regulation ( can sometimes force external growth strategies because of

restrictions on inbound FDI etc)

Steps in the M&A process

FIGURE 2

Acquisition value chain

Target selection

Valuation & negotiation

Due diligence

Implementation

Evaluation

MIS/IT Legal Corporate finance Human resource Acquiring Business unit M&A Team Acquiring Business unit Corporate finance Human resource Acquiring Business unit MIS/IT Legal Human resource Acquiring Business unit

Acquiring Business unit

M&A Team

M&A Team

M&A Team

M&A Team

Ciscos target criteria

Venture-backed start-up 50-100 employees Focus on cutting edge technology Deep technical talent Cisco kid 6 months to product launch Never do hostile deals

Ciscos due diligence

2 weeks-but extensive Focus on cultural as well as technical due-diligence; Not afraid to walk away from deal Piggy-backs off the due diligence of VCs.

Dont Underestimate Culture Issues

Cultural Integration
Culture - How we do things around here

Values, Beliefs, Norms

Useful dimensions to assess cultural differences between

organizations Formality-Informality Centralization-Decentralization Rewarding Risk Aversion-Risk Seeking Orientation to Quality Cost Orientation to Innovation Service Rewarding Behaviour Output Planning horizons

Assessing Cultural Differences

Cultural Differences: Self-Assessm ents
Formalit y 7 Individualism 6 5 4 3 Power dist ance 2 1 Out put -Behaviour
Fir m 1 Fir m 2

Risk aversion

Femininit y

Planning Horizon

M asculinit y

Seniorit y

Organizational integration
The extent of linkages between the elements of different
organizations

Location in the organizational structure Incentives used to foster collaboration Cultural integration Networks across organizations

M&A Integration at Cisco

CEO Cisco Systems

Line of Business A Business Unit Engineering Product Mkt

Line of Business B Business Unit Engineering

Line of Business C Business Unit Engineering

Manufacturing

Customer Advocacy

Sales

Product Mkt.

Product Mkt

LOB Mktng

LOB Mktng

LOB Mktng

Target Organization CEO Target Company Engineering Marketing Manufacturing Sales Customer Support

The fundamental trade-off in M&A Collaboration vs. Disruption

Organizational integration is necessary to reap synergies
through collaboration Cost Reductions Revenue enhancements

Organizational integration implies disruption in both the

short and long term Disruptions due to organizational change Loss of motivation due to uncertainty, turnover Changes in power, status, independence of decision making

The structural form dilemma

Structural Integration is necessary for collaboration between
acquirer and target organizations, but

Structural Separation is necessary to avoid autonomy losses

and disruption to innovation processes within target firm

The structural integration decision

Using patenting activity to assess knowledge and capability leverage

Patents filed by acquirer after acquisition in which Target patents are cited? Yes Capability and Knowledge Leverage (A) Pure Knowledge leverage (B) No Pure Capability leverage (C) Irrelevant (D)

Target inventor(s) are authors?

Yes

No

Effects of Structural Integration on Patenting Rates

Effects on rates of post-acquisition patenting
2.5

1.5

Non-Integrated Integrated
1

0.5

0 Capability Knowledge

Puranam & Srikanth, 2004 What they know vs. What they do: How acquirers leverage technology acquisitions, 2005

The fundamental trade-off in M&A integration

Benefits from collaboration

Net gains from integration

Costs of disruption from loss of autonomy

I*

Org. Integration

Managing the M&A trade-off

Since integration is always costly, deciding carefully on
appropriate integration level

Influencing the shapes of the benefit and cost curves

Target selection: Pick targets that generate synergies without much integration Implementation competence: Lowers costs of integration for any given level of integration

Get The Leadership Team Established Quickly

Implementation process at Cisco

Goal: Emphasis on retaining top management and technologists Structural and incentive integration- considerable autonomy retained after acquisition as target made new business unit Cultural (human) integration- buddy system, careful target selection Networks: Co-location in most cases Clear communication & expectation setting Quick wins Track performance at 30, 60, 90-120 days. Gatekeeper

Acq. Communications - Fast Start

Pre-Announce

Internal Announce - Cisco team on-site w/ sponsoring exec. Public Announce

- Financial Q&A - Exec. Summary

Integration -- Weeks 2/3

- Chambers email - Cisco press release - New acquisition live on CCO/CEC - Email alias active - single point for inquiries - Acquisition Snapshot - HR team onsite for 2-4 weeks - Virtual team members identified - Internal integration kick-off - Weekly integration meetings

Acq. Integration Dashboard

Acq. Integration Dashboard

Ciscos M&A success

Good management ?

..OR good fortune?

Disciplined target selection Implementation competence Targets that deliver synergies with limited integration Organizational structure

Overvalued stock Monopoly power and the luxury to choose among targets Opportunities to learn from many small deals

Growth market

Four general insights about M&A

M&As often fail because they are complex Its not a single event! Integration must always balance a tradeoff between achieving collaboration and destroying motivation However, much evidence to suggest that a quick, well communicated implementation strategy is uniformly good. Cultural alignment is easier achieved through selection than change Its easier to change employees than change their culture. However, it pays to be at least aware of cultural differences, even if they cannot be reduced. Experience and routinized process helps But is a luxury that only repeat acquirers can afford.