M&A Innovation

Social Innovation
June 7, 2008
Innovation Telltale
June 28, 2008

M&A Innovation

Relying on mergers and acquisitions for growth sends a signal that you don't know how to innovate or how to manage it. M&A has other problems, too. Companies tend to overpay which actually destroys shareholder value. At best, firms end up paying full value, neither better or worse off financially. The firm grows in size, not value, and pays in the form of distraction. What if you could use the tools and processes of innovation in mergers and acquisitions? How could it help? Would you select acquisition targets better? Could it help understand the valuation better so you get a better deal? Might it help you implement better? I believe innovation techniques could be applied to all three. Here is one example: targeting - deciding who to buy.

Relying on mergers and acquisitions for growth sends a signal that you don’t know how to innovate or how to manage it.  M&A has other problems, too.  Companies tend to overpay which actually destroys shareholder value.  At best, firms end up paying full value, neither better or worse off financially.  The firm grows in size, not value, and pays in the form of distraction.

What if you could use the tools and processes of innovation in mergers and acquisitions?  How could it help?  Would you select acquisition targets better?  Could it help understand the valuation better so you get a better deal?  Might it help you implement better?  I believe innovation techniques could be applied to all three. Here is one example: targeting – deciding who to buy.

Imagine you are the CEO of a bank, perhaps headquartered in Europe.  You and the other board members have decided its time to deliver more value to the shareholders by growing the business. You decide to
acquire another bank with all the spare cash you have accumulated (rather than just give it to its rightful owners.) The question is: which bank?  Should we buy one in Europe to expand our share while eliminating a competitor?   Should we expand to the U.S. market and buy one there?  Should we buy a struggling bank, get it cheap, and restore it to profitability?

No, no, no. Too simple and obvious.  Nothing innovative here at all.  Let’s instead apply the Subtraction Tool from Systematic Inventive Thinking and see how we can re-frame the question.  Start by listing the components of your bank.

  1. Employees
  2. Customers
  3. Assets
  4. Property plant and equipment
  5. Brand
  6. Systems
  7. Management

Now, one at a time, let’s remove a component, then ask ourselves which bank we should acquire.  Imagine you had no customers. You still have all the other components, just no customers.  What bank could you
acquire that had the ideal customer base for YOUR bank given what it’s all about?  Would you want customers who were more diverse, higher income, more profitable, lower cost to serve, more loyal, etc?  In other words, acquire a bank that delivers the perfect complement of customers.  Now remove employees.  You have all the other components, just no staff.  Now what bank would you buy?  Which has the ideal employee base for who you are?  Would you go after employees who are smarter, less costly, more diverse, younger, older, etc?

The same process, done for each component in succession, gives you a whole new innovative perspective on who to acquire.  It helps you understand why you are buying, what you are getting, and how you
expect to create new value and competitiveness.  It helps you understand The Bet – what the deal is really all about.

M&A is an expensive way to grow.  By adding the gift of innovation to the process, shareholders stand a better chance of seeing more value.