When Innovation Stops

I don’t have a wealth of experience in M&A, having been directly involved in only 14 deals over the course of my professional career. 

Grad school studies arguably complement my limited hands-on experience.  My focus was on M&A as a corporate strategy.  And I wrote a master’s thesis on the question of value creation for shareholders, resulting from a pursuit of M&A as a formal corporate strategy. 

Overall, in this regard then, I offer limited standing.  But I would prefer to bow to the superior experience of serial M&A practitioners, many of whom have successfully executed hundreds of M&A deals and oftentimes, even more.   

Cisco ($CSCO) is a great example of a serial acquirer.

There are many reasons why corporations acquire or merge with other companies. 

These may include e.g. removal a competitive threat; an attractively priced ‘buy’ because of market/economic conditions; the acquirer’s ego; to gain operational efficiencies (e.g. vertical integration); to infuse innovation; etc.

It is this last point – innovation – that has perked my attention.  Technology companies love to proclaim constant and ongoing innovation, new releases, etc.

Meanwhile, ‘behind the curtain’, innovation is often limited to rather simple product enhancements, new feature functionality to address internal operational processes and/or deficiencies... a facelift here, a new skin there, etc.

Our generation has probably witnessed more innovation that any that had gone before.  Just think of smartphones, tablets and MP3 players over the past decade.  Apple ($AAPL) may come to mind.  Or how about start-ups like Zipcar (now owned by AVIS Budget, $CAR), Uber and Lyft… without risking to forget more mature innovators, like Twitter or even Facebook ($FB).

Innovation stops when a company starts to manage fundamentals.  Very often, if publicly traded, this entails managing the investment community, shareholders and ‘related persons’ at the expense of ongoing innovation and the quest for continued, organic growth.

In corporate strategy language, managing fundamentals literally means managing the corporation’s valuation and earnings.  We expect this type of focus from more mature companies, executed by CEOs more inclined to milk the proverbial cash cow, than grow new business aggressively. 

There is room for managing fundamentals, but know that a dedicated focus on metrics like EBITDA and the stock price (valuation) will always distract attention from the other assets… more important assets like the people, as in the resources who deliver the creativity, new ideas… and innovation!

A chasm exists between start-ups attempting to innovate and add clients with a total disregard for business fundamentals… and a more mature company focused on managing it’s fundamentals, perhaps at the risk of lacking or losing sight of innovation.

Ironically, when innovation stops, client attrition accelerates!  In fact… the latter is the surest indicator and measure of paused/stopped technological innovation.

The next time you set out to make an acquisition, make sure you don’t discard the hunger, creativity and innovation that may have been embedded in the purchase price.

A successful acquisition that includes a true, new innovative technology may be your only method and sole chance to claim status as an innovator!

For more on this complex subject I offer a related, published research paper that you can buy by clicking here (Kindle Version for only $0.99).

Disclosure: long $CSCO