Why Traditional M&A Is Becoming Less Important

May 25, 2018 David Harding

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From 1870 to 1911, John D. Rockefeller built what was arguably the single most impressive business organization in history: Standard Oil. Mr. Rockefeller’s business strategy was to vertically integrate every aspect of the oil business (exploration, development, logistics, marketing) to assure an ongoing competitive advantage. His vehicles were not just mergers and acquisitions, though there were plenty of both along the way. Rather, they were interlocking series of trusts, partnerships and alliances designed for flexibility and control.

No one’s expecting or advocating a return to Standard Oil’s monopolistic behavior. But some elements of what Rockefeller created may be coming back into vogue.

Consider today’s trends in M&A. Companies are seeking to be quicker on their feet and more innovative. They understand that they often need new capabilities to realize these objectives. So more and more deal activity focuses on acquiring those capabilities. Traditional scale deals now account for only about half of all M&A, according to our most recent proprietary research.

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The wrinkle here is that capabilities reside partly in people, and an old saw of M&A is that you can’t buy people—they will walk out the door. (Our own consulting industry is the poster child for this phenomenon.) So we can expect that, in addition to formal mergers and acquisitions, the M&A of the future will consist of a potpourri of joint ventures, minority investments, alliances and incubator-type investments—anything that helps keep the relevant people on board and productive—which sounds very similar to Rockefeller’s strategy.

Of course, we can already hear the objections coming from the grizzled veterans of traditional M&A. One will certainly be, “Been there, done that, doesn’t work.” Another is, “How will a company like that ever be managed?”

But things have changed pretty dramatically during the past 20 years. First off, overall deal success rates have continued to improve. Executives have gotten much better at buying and integrating businesses. The old conventional wisdom that most deals destroy value has never been less true.

Bain research also shows that the success rate of unconventional deals has improved, far more than is usually believed. Joint venture deals, for example, actually show returns similar to those of the best acquisitions. Likewise, the airlines have demonstrated that well-constructed alliances can be a powerful way to build market position and capitalize on scale.

The new face of deal making will take a variety of forms. Google (along with its parent, Alphabet) is known for importing talent through acquisition—and Google is a very prolific acquirer. Best-in-class players, such as Intel (through technology partnerships) and Tyson (through new-product incubators), have developed the tools to incorporate many different flavors of deal making. Discovery, the South African insurer, has formed strategic alliances with leading insurers around the world to license its Vitality platform—a quick, low-cost way to gain access to new markets. Discovery also gets access to all the data from these users, allowing it to improve Vitality.

Or consider online companies Alibaba and Tencent in China. Both participate in e-commerce through a variety of mechanisms, including partnerships (Tencent and JD.com), acquisitions (Alibaba and Ele.me), and partial equity ownerships (Tencent and grocery store Yonghui). Tencent has expanded its partnership with JD.com step by step, beginning with an equity investment, moving into data sharing for better customer insight, and then making joint investments totaling more than $6 billion in e-tailer Vipshop and mall operator Wanda Commercial.

Similar to Rockefeller, the deal makers of the future will seek whatever arrangements allow their companies to build capabilities, rather than total-control buyouts. These new organizations are likely to operate quite differently from traditional corporations. The most successful will develop clear joint goals and an entrepreneurially enabled management style that focuses more on outcomes than on control.

Managers will also have to embrace the concept that not all ideas will be market winners—but until you try, you won’t know. Failure doesn’t necessarily indicate bad management, and the folks in HR must learn to separate business results from their assessment of the managers involved. Amazon, for one, knows this well: Everyone is impressed with the company’s big successes, but equally important is how quickly the company acts to shut down poor performers such as the Fire Phone and Amazon Destinations. Today’s low cost of capital creates a powerful financial incentive to put money to work by investing in a portfolio of ideas and capabilities. Companies will need to double down on what works and quickly cull the losers.

Looking out still further into the future, we may see companies that differ even more from today’s corporations. Consider Elon Musk’s enterprises: Tesla, SpaceX, SolarCity, and the Boring Company are companies with different missions but cut from the same cultural cloth and with organizational overlaps. (Tesla and SolarCity have recently merged; SpaceX uses technology from both.) In some respects this represents a return to the concepts of the Japanese keiretsu or the Korean chaebol.

A 1911 Supreme Court decree famously broke up Rockefeller’s Standard Oil into 34 different companies. Though hotly contested at the time, the breakup turned out to be a boon for shareholders, creating a fierce set of rivals that amassed immense wealth. Likewise, our research shows that active divestitures and separation activity should be a regular part of the M&A toolkit. The best performers may enter into plenty of capability-driven business combinations, but they also prune the portfolio religiously.

So, in many respects, we can expect M&A in the future to look very similar to M&A in the past—the distant past. Similar to Rockefeller, deal makers will pursue a strategy of alliances, joint ventures, and partnerships that can come together temporarily or permanently to create value.

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