Last week I gave a presentation at the 100% Open Innovation Union about how companies can enhance innovation through mergers, acquisitions and minority stake investments.
M&A and investment is a central part of business life. Last year in the UK alone, acquisitions worth about £60 billion were completed. Based on a quick scan of the press release archives, IBM has made over 50 acquisitions over the past five years. As is the case for many large companies, it’s a core part of our reinvention strategy. The ‘injection’ of new technology, people and ideas enables us to move into new markets, adapt more readily to customer needs and gather the ingredients necessary to create our next wave of products and services. On a personal level, I’ve experienced four or five acquisitions, both on the acquired or acquiring side, and I expect many people have been through plenty more.
But what’s the relationship between M&A, investments and innovation?
As the graph in this presentation illustrates, M&A and investment activity tends to happen in waves, usually triggered by circumstances in the broader business environment. Traditionally, the objectives for M&A and investments tended to be either strategic (e.g. increasing market share), economic (e.g. creating economies of scale) or financial (e.g. gaining access to more cash to reduce leverage). An increasingly common objective driving the next wave of activity is boosting innovation. Established firms are facing growing challenges to compete in their core markets. Disruption by new market entrants to their business models, increased competition, market fragmentation and the rate of technology change all make it increasingly difficult to keep up. M&A and investment offers a swift way to get access to new resources and capabilities that can boost performance in the short-term and enhance innovation in the long-term. But this strategy for growth is not without its challenges.
Statistically-speaking, M&As and investments are fraught with difficulty and result in a very high rate of failure, in terms of the value delivered back to shareholders of the acquiring company (acquired companies tend to fare much better, any budding entrepreneurs out there might be happy to know). And that’s before we consider how they deliver on something as intangible and long-term as innovation.
Certainly, one consideration needs to be how the effect of M&A and investment on innovation is measured, as the majority of research tends to focus on how M&A performs against traditional strategic, economic and financial goals. However, my MBA research suggests there are a number of factors which do influence the level of innovation value companies can gain. To make judging the success of the deal easier, many companies switch from using long-term strategic measures of performance to short-term financial measures. For managers coping with the complexity and workload of integrating a new firm and team of people, financial measures are must simpler and clearer to comprehend and report to shareholders. However, their focus on short-term performance runs contrary to innovation which requires a longer term view, so the management activities the financial measures encourage simply serve to constrain innovation, despite the best intentions of the managers themselves. A further factor that affects innovation is the judgment of synergies between the companies. If the activities of the firms are too similar they will duplicate each other, leading to practical tensions between teams and the creation of little new value. If the companies are too different, they will struggle to find the points of integration where creative sparks can ignite innovation. To stimulate innovation, companies needs to have enough in common in terms of domain experience, processes, products and practice to give a basis for collaboration, but still be able to bring new ideas and methods to the relationship.
Certainly, if companies can overcome these hurdles and others that tend to occur, then there are significant benefits to be gained. Many companies report boosts in the quality and quantity of R&D inputs from successful M&A and investment activity. Outputs in terms of patents to fuel future innovation activity (a target IBM prizes highly) and of course new products and services taken to market can also increase significantly. As more established firms explore routes to innovation and face pressure to adapt more rapidly to market changes, I expect M&A, investment and other forms of alliance partnership will grow as priorities. No strategic initiative is without challenge though, and the key question companies must answer is how they navigate a way around the barriers to achieve the benefits.