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Our Problem Isn’t Too Much M&A. It’s Too Little.
Earlier this week I was reading Ben Thompson’s always thoughtful musings about Apple and Netflix, titled Apple Should Buy Netflix. He subsequently wrote a counter point in his private newsletter, to which you must subscribe, arguing Apple shouldn’t. In any case, in the original public piece, I came across a phrase that stopped me cold. He writes:
I am, as a rule, skeptical of large acquisitions: they are all too often a byproduct of management empire-building, and value-destructive for shareholders.
But what’s the problem with “management empire building”? Isn’t that how….empires are built? After all, Google bought Android (and Applied Semantics, and DeepMind, and…). Facebook bought Instagram (and WhatsApp and…). P&G bought Gillette. Deeply lodged in Thompson’s statement is another fundamental business truism: That anything “value-destructive to shareholders” is strictly verboten.
This led me to think about the purpose of business, a topic I’ve been attracted to for the past few years, increasingly so at present (yes yes, NewCo and all that). Thompson’s point is that the purpose of business should be to extract capital from markets and deliver that capital with all due haste and care to shareholders. Acquisitions which can’t clearly deliver increased wealth to the pockets of equity holders are to be avoided. Milton Friedman beams in his grave.
I’ve had some experience with this kind of thinking, both on a public board and in private company transactions. And I have found it to be incomplete. Certainly one purpose of business is to deliver value to shareholders. But if it’s the only purpose, that business becomes destructive to society — lowering wages, cutting corners on quality, outsourcing environmental costs to communities and the like. And destruction is the opposite of creation, after all.
So I wondered: what if the purpose of business was to drive and express human creativity? Certainly the creativity of a charismatic founder or CEO, but also of the company’s employees, partners, customers, and the community that business impacts?
What if beyond capital returned, a business measured the health and happiness of its communities as a primary driver of ROI? What might that business ecosystem look like?
Answering those questions feels increasingly like a social imperative. Here in the Valley, we’ve begun to normalize the concept of massive social and economic disruption from robots, AI, and automation. Millions of jobs are about to be erased forever. And I’ve found our answers to the question of what the economy might look like once robots take all our jobs unsatisfactory. Broadly they tend to aggregate in the loose idea of “human creativity” — we’ll create an economy that values human creativity above all else. Tim O’Reilly expanded on this in our interview this past summer. In it, he said:
Let’s assume that all that can be automated will be automated. Everybody says, “Well, everybody will be out of work.” I say, “Well, what would happen if everybody were out of work?” We already know what happens when people have enough. They compete on the basis of added value that is creativity, that is caring. People in that abundance make a new economy of things that nobody needs, but that are things that people want. We start shifting the economy there.
It sounds awesome. I want to live in that world. But how do we get there?
Perhaps we get there by rethinking the “true north” of our market based system, from “extraction of capital for shareholders” to “maximization of creativity for all stakeholders in a business.”
How might that work? Well fortunately, we can see it already happening, if we just pay attention. I’ll give you two examples: First from my own experience, and second from major deals that have happened in the past year.
The personal: I’ve been on the board of two very different companies who both faced existential moments. These moments required creativity, boldness, and long-term thinking. In both cases, the CEO and board decided to make acquisitions that were hard to defend against the true north of capital extraction. These acquisitions demanded we pay several times traditional market comparables, meaning we were betting on integrations and projected growth to deliver over the long term. If they didn’t, the acquisitions would have destroyed shareholder value. So far, both bets are working — but only because we planned for that long term horizon and defended a creative approach to business.
My second example is a recent trend in large company M&A. Companies like Unilever, once cautious and predictable in their acquisitions, are making increasingly “risky” bets on company and culture-changing startups. Buying Dollar Shave Club for a billion dollars, or Seventh Generation for nearly as much, represents a major shift in thinking about the creative potential of acquisitions, and the purpose of consumerism. BigCos are starting to get it. They are paying for belief in the future again, and taking creative bets with significant amounts of capital. That should be encouraged.
There are metric tons of ink dedicated to warning leaders off hail mary M&A transactions, and for the most part, I understand the wariness CEOs and board directors have about such moves. But then again, M&A is the lifeblood of business creativity. Recombination — of ideas through companies, of organisms through predation, of genes through mutation and reproduction — is the force that engenders creativity. The problem isn’t we have too much M&A. The problem is we have too little!
If creativity were valued over relatively short-term capital extraction, perhaps a new business culture would emerge that viewed M&A as a natural part of the evolution of business. Most M&A deals fail. Great! Then let’s get better at it!
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