The recent news that Apple is looking at a $3.2B acquisition of the DRE music business – much larger than it’s usual pattern – brings up an interesting question: What happens when a company moves from smaller deals that are easily digested into core business and product operations, to larger and more highly valued entities?
There are two branch discussions that quickly emerge from this question:
- First, what are the implications for building and realizing full financial value?
- Secondly, what happens to the culture when a firm moves to bolt on, rather than tuck under, acquisitions?
Conundrum #1: Culture
Let’s take a look at the second one first – culture. When entities do smaller deals, the culture of the parent remains undisturbed, and quickly dominates the company being acquired. Cisco has done hundreds of these smaller pickups, and has been very open in sharing how it thinks and executes.
However, when you bring a firm into the fold that has a larger mass and its own strategic arc – with personnel and contributions that you want to retain – what happens is that a hybrid culture emerges. The acquired company is not the same, but what is unexpected is that the parent changes, too. There is a “third way” forward that, if well done, captures the highest value of both companies relative to customer and market need. The classic book Five Frogs on a Log speaks to best practices here, perhaps the most important of which is to establish a very clear integration thesis and move very swiftly to implement it. There are innumerable ways to take the enterprise down side roads, but to steer it to best outcome requires steely-eyed leadership.
Conversely, when the results become internally focused and customer value is subordinated to internal squabbles, what emerges is an under-performing hybrid that can take away value from both pre-acquisition firms.
Conundrum #2: Financials
Which brings us to question one: financial performance of the combined entity. The business valuation consultant needs to weigh the pre-acquisition value of each firm, along with their combined market leverage – the latter having been balanced to remove “redundancies” (usually cloaked under the euphemistic term “synergy”). Depending on whether you are buying or selling, there can be huge variances in these estimates and it can be very hard to get to a solid foundation of truth. Complicate this with the mandated secrecy of early discussions due to SEC issues, and you can see how very hard this part can be.
Executing to these financial expectations is notoriously hard on both the top line and cost line: go-to market teams squabble, the competition seizes the market during the confusion and value is lost. It takes very effective leadership throughout this process to quickly assess capability and remove costs from inside the newly formed firm. Time is of the essence here, and speed to decision needs to be the dominant metric in the first days.
Now the final point – Apple is clearly working a strategic arc of its own here, and it intends to move its culture. Hiring Burberry CEO Angela Ahrendts is a clear indication of a more intentional move to the center of the original firm’s vision. Steve Job’s famous positioning at the intersection of liberal arts and technology may have been listing towards device centricity.
Picking up DRE would allow a synergistic & signature audio experience to go along with the capability Angela brings from the intersection of technology and high-end customer experience. It appears it wants to be a different firm than it is now – and it may be using the “third way” strategy to get there.
So, what are the takeaways here?
- It’s very hard to predict the outcome of combining two cultures – operations profiles, customer experiences and supply chains all need to be harmonized. The costs and outcomes are a very big reason for the dismal track record of financial performance in the m&a industry.
- One way to guarantee a cultural shift is to make a big acquisition and burn the boats to guarantee the only way is forward (i.e., no retreat). This work takes serious and visionary leadership (think expedition leader, not tour guide).
- All these effects apply to internal innovation, when it’s done by a “skunk works” team. When the results of the isolated team are onboarded back into the core organization, all the issues of integration and grafting cited above come into play.
I’m very interested in your experiences in acquisition and integration of larger entities. Please drop me a line or leave a comment below.
