Buy Vs. Build: Acquiring For Innovation
In a recent article, we discussed how accomplishing systematic large-scale innovation practices remains elusive and confounding for most companies. This is largely due to the way managers are evaluated on current results, not future ones. The article, Kiss A Lot Of Frogs: Business Strategies For Innovation revealed the challenges faced by risk averse organizations and described what is really required to succeed in home-grown business innovation, providing a roadmap for business leaders to consider implementing in their own organizations. There are several other ways to fill the innovation gaps of your business and knowledge base with external technologies and ideas. Those include:
- In-licensing (a partnership between two companies that have shared intentions, goals or fields of interest)
- The capture of knowledge from alliances and other joint research projects
- Acquiring innovative companies
- Rolling the dice on venture investments
This article examines the merits and risks associated with the strategy of acquiring innovation.
Acquisition As a Strategy
Just as innovating requires a competency for organizations to develop and master, integrating another business into the fold of a mature organization requires skill as well as careful planning. There are significant risks associated with acquisitions, beyond simply overpaying. In fact, it is hard to name many business maneuvers that are as risky and complex as mergers or acquisitions. The statistics show a very low success rate (consider reading Mergers and Acquisitions: Examining the M&A Ecosystem).
The IBM Approach
Regardless, many companies follow an acquisition strategy to stoke the pipeline with innovative new products and services and some have defied the odds – making this strategy a success. As a colleague recently pointed out, companies like IBM buy a lot of companies annually and are pretty good at integrating the innovators quickly. In fact, IBM’s venture capital division works with top-tier venture firms across the world and is aligned closely with its corporate development group. This group is responsible for the firm’s M&A strategy. As a result, IBM has acquired more than 100 companies in the last decade, and the firm’s venture capital group had relationships with 40 of these companies and their venture investors. Using this process of working with young, innovative companies, IBM has been able to identify new products and technologies that its R&D group hasn’t thought of.
Other Factors To Consider
One might assume that it boils down to the classic “buy vs. build” decision, where “buy” equals acquisition of a company for its innovation capabilities or cutting edge offerings. In this case, “build” relates to developing innovation from within the existing company’s creative workforce. While it may seem that simple, it isn’t. Companies following an acquisition strategy need to have a game plan for either integrating acquired companies or leaving them as stand-alone subsidiaries from which they can farm innovative creations. The problem with integration is that can be difficult to pull off successfully. Buying a company is not like purchasing a piece of software that can be expected to behave in a precise way that will meet our specifications. Instead, we are likely dealing with the integration of two very different cultures, and the human capital element in that mix is far from predictable. You do not know going into the acquisition if the entrepreneurial spirit that led to the innovations of the target company will survive an integration effort and persist to lead to more valuable creations in the future.
That leads me to my second point. Even if acquisition is the chosen strategy, without a fundamental understanding of and appreciation for the risk-taking innovation style of the purchased company – how can they be successfully managed so as not to squelch the creativity inherent in their culture? One approach is to make sure that the acquired company is left alone to be entirely autonomous, protecting the formula for innovation they have developed and insulating it from the dominant culture and politics of the parent company. But with no attempt made to integrate the firm into the parent company, will the full benefits be realized?
Acquisition for innovation is but another option for corporate leaders to consider, and it is not available to all organizations. It requires the ability to know what a good acquisition target looks like and have the means to successfully finance a deal. The host (acquiring company) must be healthy enough financially and culturally to absorb the other business and harvest the benefits intended through the acquisition. This strategy also requires the parent company leadership to be clever enough to understand how to own the acquired business while leaving their innovation success formula alone. In some cases that may dictate not forcing an unnatural integration of the two companies. Either way, it is arguable that an innovation acquisition strategy requires having an innovation culture to begin with.