The New M&a Playbook

III. Executive Summary Report

The new M&A playbook. 2011. Christensen, C., R. Alton, C. Rising, & A. Waldeck.

Executive Summary: (7 ~ 12 lines)

        When CEO look for exponential growth in a long run, they often find acquisition seductive. Truly, companies spent 2 trillion dollars for acquisition but failed at a rate between 70~90%. Prof. Christensen theorize the success path by analyzing failing factors in this article. There are two motives to execute the acquisition: First, Boost company’s performance(LBM) and second, Reinvent the business model(RBM). LBM enables company to command premium price and sustain acquirer’s trajectory but this deal not only dissolve the business model of acquired firm but also allowing CEO to pay unrealistic amount for acquisition. Only a few companies that conform with specification in LBM could survive. On the other hand, RBM suggest the way to acquire firm along with their business model, use it as a platform for transformative growth. Ultimately, either LBM or RBM should be considered thoroughly because growth led by premium price and finding new customers are as hard as achieving on their own.

Goal of the author: (2 lines)

This article aims to direct the company better guided in selecting, pricing and integrating the acquisition so it can prevent the failing factor and bring up the success rate.

Key arguments: - with sub-titles

Boosting current performance by LBM

• Acquiring resources to improve product or service that’s still developing and therefore command the premium price like the case of Apple and Cisco’s acquisition.
• Acquiring resources to lower the costs, successful only when acquiring company has high fixed cost because it impacts the profitability. The case example is Oil retailer, pharmaceutical products, Arcelor Mittal’s acquisition of steel companies and Anadarko acquisition of KerrMcgee which are mostly distribution, retailer and etc.
• Failing case of LBM is factored by company tempted of one stop shopping because cross selling can only work when customer needs are in same place and time and it happens in rare occasion. Case example is Sandford Weill’s financial supermarket

Reinventing your business (RBM), the company can seek exponential growth with exceeding the investor’s anticipation through these.

• Acquiring disruptive business model because product is simpler and affordable. Nucor, the disruptive steel operator’s initial value was hidden but with its advanced technology, they outrank the product tiers along with stock appreciating 27% rate annually. Second is EMC acquisition of VM ware shown 44-fold increase of its initial investment. Third, Johnson and Johnsons’ 41% growth after changing growth trajectory in division
• Acquiring to decommoditize, the most profitable point shifts as proprietary, integrated offerings transformed into commoditized ones. Pharmaceutical industry is a failed example.
• Paying the right price because CEO tends to over pay LBM and underpay RBM
• Avoiding integration mistake like Daimler dissolving Chrysler business model as key value to it disappeared after acquisition.

Critiques/comments: (5 lines)

The author ultimately demand CEO to not expect the magical growth led by acquisition in either form of LBM or RBM. The process to gain something is as hard as finding it internally in the firm. Even so, if company desire to jumpstart the growth by acquisition, the specification has to be identified, so it could reach the success. It’s always better to remind of basis 4 elements on how business model is formed so acquirer and acquired both knows which acquisition strategy they would use for successful turnout.