Mergers and Acquisitions (M&A) are very popular among CEOs, even though practice and research show that acquirers usually pay too much and expected synergies are mostly not realized. Next to traditional motivations for acquisitions as e.g. access to new markets, physical resources, and the reduction of redundancies, innovation-driven M&A have gained increased importance in the last decade. While in the period from 1997 to 1999 M&A as R&D type of acquisitions made up only one percent of M&A activity in the US, the amount of global investments in M&A that aimed at achieving disruptive innovation has quadrupled from 72 to 291 billion USD in only four years from 2012 to 2016 with the driving segments being Digital, Social, and the Internet of Things. This paper intends to shed light on the main characteristics of innovation-driven M&A by discussing their motivations, expected synergies, and integration approaches. A practical example will be provided.
Challenges and underlying logics of innovation-driven M&A
Inorganic growth strategies as M&A can be a pertinent vehicle to get fast access to needed resources in order to keep up with rapid technological change and create future business opportunities. High-tech industries are continuously changing, and disruptive technologies can destroy the competitive advantage of a firm in an instant. It is indispensable to constantly screen and evaluate existing technologies on the market and evaluate demands internally. The giant serial acquirers like Cisco and Microsoft constitute a serious threat to smaller companies, and due to the high resource requirements to build a tech company some business owners prefer to become part of a global organization. The real value is typically not made up by intellectual property rights or technologies, but by the teams working among others on product development. Acquirers need to be extremely cautious to retain key inventors and resist the temptation to dissolve teams by employing only the most brilliant minds. By integrating the small, innovative target into the large, structured acquirer the entrepreneurial spirit of the target might dissolve. Additionally, conflicts can arise due to hubris and incompatibility of cultures. One way to mitigate this is to delegate integration issues to an appreciated executive with a strong professional reputation in the target firm. Another approach is to integrate administrative functions to achieve exploitation while leaving production and R&D autonomous to avoid disruptions and promote exploration (Angwin & Meadows, 2015). Acquisitions in high-tech industries were traditionally considered to be primarily a substitute for R&D, however research has shown that acquisitions can also be complementary to R&D in the process of generating innovations (Cassiman & Veugelers, 2006). This is enhanced by the high-tech products setup that typically consist of independent, standardized components. In addition to internal processes managers need to turn their attention to the hostility in the external environment that might negatively impact the success of M&A (Strobl, Bauer, & Matzler, 2018). The underlying logics and consequently the desired synergies are different for deals motivated by innovation, market extension, or overcapacity. M&A can enable companies to leverage their existing business model by either reducing costs or gaining the ability to charge higher prices. While cost reductions are nearly always announced by acquirers, many fail to meet this objective due to a high proportion of variable costs or simply a replication of the fixed costs structure in another geographic market. An improvement in the functionality of a product or service can be achieved by acquiring a company with intellectual property, inventors, and engineers that can produce a component that is not readily available on the market. This can save considerable time compared to inhouse development, as example 1 demonstrates.
Example 1: The mobile-device industry is very competitive and battery life is one of the characteristics that enable to charge premium prices. Apple previously purchased microprocessors from suppliers and recognized that power consumption can only be improved by adapting and customizing processors to their products. To develop this complementary capability and get access to qualified inventors Apple purchased P.A. Semi for 278 million USD in 2008. Consequently, they managed to maintain the price premium (Christensen, Alton, Rising, & Waldeck, 2011).
M&A are a tool for companies to keep up with the fast pace of technological change. While sourcing required resources through M&A can provide a quick fix for gaps in the product development pipeline, getting the right people on board can enable the firm to gain a long-term competitive advantage. M&A managers need to be aware of the risks from inappropriate integration approaches and the underlying logics of innovation-driven M&A, while constantly monitoring the competitive landscape.
Angwin, D., & Meadows, M. (2015). New Integration Strategies for Post-Acquisition Management. Long Range Planning, 48, 235–251. https://doi.org/10.1016/j.lrp.2014.04.001
Cassiman, B., & Veugelers, R. (2006). In Search of Complementarity in Innovation Strategy: Internal R&D and External Knowledge Acquisition. Management Science, 52(1), 68–82. https://doi.org/10.1287/mnsc.l050.0470
Christensen, C. M., Alton, R., Rising, C., & Waldeck, A. (2011). The New M&A Playbook. Harvard Business Review, 89(3).
Strobl, A., Bauer, F., & Matzler, K. (2018). The impact of industry-wide and target market environmental hostility on entrepreneurial leadership in mergers and acquisitions. Journal of World Business. https://doi.org/10.1016/j.jwb.2018.03.002