This post is by Rosabeth Moss Kanter from HBR.org
Power transfers can be fraught. But there is a path forward.
Amazon’s 2017 acquisition of Whole Foods was met with a lot of fanfare. The deal would allow Amazon to grow beyond e-commerce and sell groceries in hundreds of stores while collecting significant shopper data. Meanwhile, Whole Foods could lower its prices (organic avocados for just $1.69!) and scale up after its recent declines in sales and market share. In the words of Whole Foods CEO John Mackey, the partnership was “love at first sight.”
A year later, such optimism seems hard to find at Whole Foods. Stories of employees literally crying on the job over Amazon’s changes have begun circulating. Scorecards measuring compliance with a new inventory system are used to punish and sometimes terminate workers. A group of Whole Foods employees have recently taken steps to explore unionizing. Even customers — the stakeholders that Amazon values the most — have been angry
Roger Martin, a professor at the University of Toronto’s Rotman School of Management, offers two main reasons General Electric has lost its competitiveness. GE’s stock has been removed from the Dow Jones Industrial Average. Martin blames pressures from activist investors as well as a short-sighted mergers and acquisitions strategy. He’s the author of “GE’s Fall Has Been Accelerated by Two Problems. Most Other Big Companies Face Them, Too.”
The General Electric story, of a long-proud initial member of the Dow Jones Industrial Average falling out of that index — and appearing to be in competitive free fall — provides a powerful illustration of two effects we see throughout today’s corporate world: clueless, but deep-pocketed, activist investors and mergers and acquisitions folks masquerading as strategists.
GE’s fall accelerated on October 25, 2015, with activist hedge fund Trian announcing a $2.5 billion equity investment in GE stock, one that made it a top 10 shareholder. GE stock was trading at $25.47 at the time of announcement, with a dividend of $0.92 per share. Trian announced that with its help, GE could look forward to a stock price in the $40–$50 range by 2017, and threatened a proxy battle unless GE put Trian cofounder Ed Garten on the board. In June 2017 longtime CEO Jeff Immelt resigned
This week’s decision by U.S. District Judge Richard Leon to allow AT&T and Time Warner to complete their merger will bring to a close a deal that has been pending for almost two years.
In his blistering, 172-page decision, Judge Leon did much more than simply reject the government’s claim that combining two companies that do not compete with each other would harm consumers. He also made clear, as a matter of federal law, that the U.S. Justice Department’s view of a static media landscape is dead and buried.
“If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development,” Judge Leon began his decision, “this is the one.”
The judge was faced from the outset with a stark choice: Was the relevant
Mergers and acquisitions (M&A) activity is booming. From the $68 billion CVS-Aetna deal to the $27 billion merger of Microsoft and LinkedIn, 2017 set records with more than 50,000 deals, valued at $3.7 trillion. This momentum is continuing into 2018 with the bidding war for UK media company Sky ($24–$30 billion) and Microsoft’s $7.5 billion acquisition of GitHub.
Yet while mergers can offer a tremendous opportunity for expanding a business and creating value, they can be extremely disruptive — and handling the organizational changes of M&A is essential for realizing its benefits.
What ensures that M&A-driven reorganizations are successful? We took this question to our data. Over the past year, we carried out an online survey of 2,500 reorgs (you can still complete the survey and benchmark your reorg here). We compared the results of M&A-driven reorgs with other forms of reorgs to provide fact-based advice for executives.
Our analysis shows
M&A and partnership deals are at an all-time high. But what about competition?
The U.S. Department of Justice (DOJ) wants to know too. It is reviewing or arguing this question in court for a slew of proposed mergers — AT&T-Time Warner, T-Mobile-Sprint, CVS-Aetna, and Express Scripts-Cigna, to name a few. A court decision on the AT&T-Time Warner deal is due out soon, and it will likely affect the prospects for many other cases.
Traditionally, antitrust regulation has looked for whether a merger increased or decreased competition in a particular market. Stated in this way, competition sounds like something you can measure, like mass or volume — there can be a lot or a little of it, or too much or too little.
Sometimes this model fits reality. In
M&A deals that are made for the purpose of acquiring new technology can make or break a company. At worst, a disastrous deal leads to wasted effort and dollars, often in the millions or even billions. On the flip side, a strategic transaction can catapult a company into first-mover position, give a speed to market advantage over rivals, and potentially let a larger company run away with a new market. Take Google’s purchase of YouTube, now a multibillion-dollar revenue stream that’s fueling the disruption of cable, or Facebook buying Instagram, which solidified its social media dominance.
But the M&A landscape is also littered with examples of failures, such as Microsoft’s attempt to buy its way into the mobile market by acquiring Nokia. And probably the most notable example — AOL’s ill-fated purchase of Time Warner during the dotcom bubble (or better phrased, Time Warner’s mistake in selling to
Microsoft’s $7.5 billion acquisition of GitHub is a perfect illustration of how value is ascribed differently in Silicon Valley than in the rest of the world. GitHub was acquired for close to 30x annual recurring revenue (an astronomical multiple). To put this in perspective, Microsoft acquired LinkedIn for $26 billion in 2016 (7.2x revenue), in what was considered one of the richest tech deals ever.
So why the difference? The answer lies in untangling a pervasive misunderstanding of how Silicon Valley works and where these astronomical values come from.
In Silicon Valley there are basically two ways of creating shareholder value: financial and strategic. Financial value is the stuff of business school and stock markets. It’s about multiples of revenue or earnings, sales growth, profit margins, and management theory. It’s about the ability to grow and prosper as an independent company.
When we talk about how the price of oil will affect
When companies merge, customer experience (CX) is often overlooked — yet it’s arguably one of the most important aspects of any company. In fact, according to Gartner research, tomorrow’s companies are expected to compete primarily on customer experience.
I just took my company through an acquisition and found that even the smallest operational change can have a significant negative impact on both employees and customers. While keeping CX top of mind throughout the whole M&A process is challenging, the benefits are undeniable: It keeps your most coveted customers and your team intact.
Maintaining quality customer experience, we found, requires a mix of expert individuals and operational processes. Here are some of the best practices we learned:
Separate the M&A process from normal business operations. It’s easy to get caught up in the logistics of trying to integrate two organizations. After all, during a merger, that’s where all the
Large companies in industries ranging from retail, to aerospace, to financial services are buying talent and technology to develop new digital capabilities and reinvent themselves quickly. But they will need to adopt the more hard-headed way that Silicon Valley companies evaluate acquisitions for their deals to pay off.
Indeed, there are signs that corporate leaders are repeating the mistakes of the heady days of 2000, when the fear of missing out sometimes overpowered the logic of a proposed deal. That year, according to our proprietary research, non-tech companies scooped up 707 computer and electronics firms, often at highly inflated prices. In the decade since, by contrast, non-tech companies acquired 262 companies per year, on average, according to Dealogic.
Since 2015, our data shows that rate snowballing again, nearly quadrupling to an average of 1000 deals annually. Notably tech firms acquired an average 250 tech companies annually between