28 December 2012

The Untapped Power of Corporations

Around this time last year, I posed the question of whether companies, in addition to producing bottom line results, should be expected to improve its surroundings, spearhead charitable efforts, and contribute to the general welfare of society.  While this topic is debatable, the power of the business community to actually do so is not.  Businesses have a much broader reach, resource base, and capability than other types of organizations to help address the world's problems.  So why then do they remain silent on most of the issues that matter?  Given business entities unique strengths, shouldn't it be imperative they have a seat at the table when it comes to influencing policies and solving society's problems?

If today's climate in Washington is how government is supposed to work, then clearly something is wrong.  Generally speaking, the business community has rightly stayed clear of politics.  They have long subscribed to the notion of the less they deal with lawmakers, the better off they are to be left alone to manage their own businesses.  Since enterprise leaders have a better handle of how issues affect people and how to craft possible solutions, this practice is a shame.  Amongst the fiscal cliff debacle, it is refreshing to see business leaders come together to form the Fix the Debt coalition.  A few, like Starbucks CEO Howard Schultz, have taken a stand to end lobbying and the influence of special interests in Washington.  Only time will tell if its too late, but at least some business leaders are stepping out of the boardrooms.  Don't get me wrong, corporate lobbying has no doubt created much of the political mess, but I think a broader effort among business could certainly help rise above the ineffective voices of partisan, agenda-based politicians.  

The same sense of indifference can be seen on the charitable front.  While individuals have been very active, large corporate outreach programs have typically been PR campaigns or a way to build employee morale.  As movements in small business such as social entrepreneurship continue to grow rapidly, large corporations have largely been absent from newer trends in giving.  Whether it be microfinance or businesslike operations like the Gates Foundation, capitalistic-based solutions have long been very effective ways in addressing the world's problems.  So its too bad that the largest concerns with the most business experience are on the sidelines.  Some newer companies like Google are aggressively building their foundations, but these are small efforts compared to the opportunity.  And in the long run, CEOs know that a healthy macro climate creates an environment for enterprises to thrive.  Just like a category leader has an obligation to grow the market, the same should be felt from corporations to affect societal change.

It's not all about giving back though; over 90% of CEOs interviewed in a recent Accenture survey linked better corporate performance to sustainability and community efforts.  Certainly with larger and more complex problems looming ahead, businesses see the need to become engaged in solutions to protect the markets in which they participate.  From a societal standpoint, the benefits of corporate involvement are clear - they have the resources, capital, independence, and track record to solve problems larger than what governments or even non-profits can.  It is also a largely untapped resource as corporations have been inwardly focused for so long.  A large resource reallocation is definitely not needed as the collective power of the business community is so great, but rather a mindset shift that focusing solely on a company's P&L may not be enough to yield the same success in the future.  Perhaps with Starbucks and Google in, we can finally get the Republicans and Democrats out. 

14 December 2012

The Curse of the Defensive Deal

I've written extensively about how acquisitions, despite Management's gravitation towards them, generally fail to produce the expected results.  Defensive transactions in which a Company has fallen behind or fears disruptive players or technology is one of the most popular deal rationales.  In the short-term, buying the capability seems to be an easy way to catch up; but they are categorically the worst poorest performers of all deals.  They destroy shareholder value, fail to rejuvenate the acquirer, and slows the momentum of the targeted company.

Technology disruption is a classic area of defensive deals.  During dot com mania, traditional companies were scrambling to figure out the internet revolution.  Time Warner merged with AOL.  Barry Diller bought Ask.com, Match.com, and other properties. Valuations would never prove in not only because of price but also because of the struggle between cannibalizing existing business and investing in competitive areas.  The “do both” strategy may leave a company well hedged but far from market leadership.  Legacy companies have even tried to build barriers around competitive threats by forming consortia such as Hulu and Orbitz, but ultimately spun them out when they realized the upstarts were better off without their larger agendas involved.

Cost deals are another example.  These generally occur in declining markets with hopes of building stronger cash cow market positions.  Alcatel tried it with Lucent as Daimler did with Chrysler.  These were both on Businessweek's worst deals of all time list.  As HP doubled down with Compaq, IBM divested its PC business on a road to a successful transformation.  You can't stop a downward moving train - declining markets tend to fall quicker than any cost synergy model can offset.  The "more of the same" strategy fails to address the underlying problem of changing market dynamics. 

Even today’s best tech companies can fall prey to the prevent defense.  In hopes of buying some time to figure out mobile, Facebook paid a whopping $1B for pre-revenue Instagram.   Amazon’s acquisition of Kiva Systems screams defense as they try to take their robots away from its competitors.  Does Amazon not think new technology will not spring up in the marketplace?  It is ironic because the spread of ground-breaking concepts is how Amazon itself rose to ubiquity.  As the pace of change continues to accelerate, even the new leaders cannot rest on their relative positions.  Apple's erratic stock price clearly shows the markets are uncertain of whether it will be able stay ahead of the pack. 

To me, the biggest drawback is that consumers lose out when these deals stifle the offerings of the acquired company.  Google killed Dodgeball which years later came back as the white-hot Foursquare. Sprint eliminated Nextel's push to talk as signs point to competition vying for those consumers.  Do you think if Visa bought Square early on we would see the spread of mobile commerce as quickly as we do today?   Whether entities can't maximize the benefits or struggle to integrate into existing products,  stand-alone offerings oftentimes perform better when they are not clouded by alternative agendas or red tape.

Companies certainly can use M&A to reinvent themselves as part of larger turnaround strategy.  They should be careful to gain a solid understanding of the target's capability and market, build an integration plan to scale it, and protect the DNA of the acquired company.  Whether it be the result of the Innovator's Dilemma or a poor strategy for reacting to market changes, many continue to utilize a flawed defense-based acquisition strategy that leaves them worse off.   While buying might be a quick fix, a company that is facing new competition or a declining market must ultimately face those bigger challenges head on.