The McKinsey Quarterly recently featured an article entitled ‘M&A as Competitive Advantage’.
“At many companies, strategy provides only vague direction on where and where not to use M&A—and an unspecific idea of the expected source of value creation. We often find companies using M&A indiscriminately to purchase growth or an asset, without a thorough understanding of how to create value in a deal relative to others, a so-called “best owner” mind-set. Rarely is there an explicit link to organic investments or the business cases for broader growth initiatives, such as developing new products or building a sales force to deliver an acquired product. As a result, companies waste time and resources on targets that are ultimately unsuccessful and end up juggling a broad set of unfocused deals.”
Put in plain(er) English: many of McKinsey’s clients undertake M&A without having a clear logic for the deal, nor a structured set of goals for the deal and a plan on how to attain them.
Others have found that M&A failure is not for a lack of strategy, but for a confusion of strategy. Clayton Christensen and his co-authors have written of the staggering M&A failure rates that they stem from a failure to distinguish between deals that incrementally improve or protect an acquirer’s competitive advantage from deals that reinvent the acquirer’s business model. Others have similarly found various weaknesses in strategic logic as underlying M&A failure.
No doubt there is some truth to both McKinsey’s impressions, and those expressed by Christensen et al. However, in both cases, there is a further layer to be peeled back. What would make smart, seasoned, business executives undertake major deals with less forethought and planning than their winter vacation elicits? Well, obviously there are many factors – apart from the importance they attach to their winter vacation – and many of these have been discussed in this Merjerz blog before. This short post discusses one of them: the Bias for Action.
A few years ago Harvard Business Press published a book called ‘A Bias for Action: How Effective Managers Harness Their Willpower, Achieve Results, and Stop Wasting Time’. Business school classes on organizational behavior, entrepreneurship and more preach the value of ‘bias to action’. And truly, by not taking action, one will never reach results. Multiple studies have developed Richard Roll’s hubris hypothesis’ and demonstrated that senior executives are overconfident, and that this is a major driver of (ill-advised) M&A. Herein lies one of the great ironies of executive development: some of the characteristics that are optimal for helping a person create and build a business, are not conducive to success in a big, successful business. Very few executives are able to develop themselves along with their businesses. Curiously, gender plays a role here – since male executives are more overconfident than female executives (see here). In short, senior executives need to unlearn some of their bias for action, and at least in relation to M&A, a better mantra would be: ”Don’t just do something, Sit there!”
Apple, for example, has exercised admirable restraint. Though it has increased dividends and buybacks, it has largely avoided the kind of massive M&A that we frequently see in companies that are cash heavy. Compare that with LinkedIn, which despite successful organic is raising upto $1B largely to fuel acquisitions – according to rumor.
We’re just beginning to scratch the surface of the interplay of organizational behavior, behavioral economics, and corporate finance. Many more studies will no doubt surface in the coming years on executive bias-to-action and other behavioral factors in powering M&A. In the meantime, several innovative companies – Merjerz included – continue to innovate in new and better ways of doing M&A, ways that help neutralize the many strong biases that shape M&A and make it such a poor prospect in most cases.