By Ben Gomes-Casseres | Originally in HARVARD BUSINESS REVIEW |
Investment bankers are giddy at the prospect of increased M&A activity in 2014. But what they see ahead is only the tip of the iceberg.
2014 will be the year of the “business remix.” I see a rise in business combinations of all kinds — not just M&A, but also partnerships, alliances, joint ventures, and consortia that stop short of being full mergers. But it will be important for managers to know when to use each of these types of deals. The Open Automotive Alliance that Google launched this week is a reminder that twenty-first-century deals don’t always look like the M&A of old.
The competitive conditions driving one kind of combination often drive the others, too. Many industries have been ripe for deal-making for some years, but action has been slow. A decline in economic uncertainty in 2014 will now support bolder strategic moves by managers. And the long-term trends that have driven corporate restructuring are not going away — globalization, technical change, and ever fiercer competition between firms.
The term remix describes the mash-ups of music, images, and words that appear all over the web. Larry Lessig’s excellent 2008 book explains how this cultural remix creates new art. I’ll extend that idea to business.
The business remix that I see ahead will mash up the resources of companies to create new value. Think about what happens in mergers, at least in the successful ones. Assets are combined, rearranged, and repurposed to strengthen a business or to create new businesses.
But mergers are not the only way for companies to mix and match resources. The big ones between large companies, in particular, are blunt tools that are costly when they fail. By one insider’s account, recent mergers among big pharmaceutical firms led to R&D cutbacks and reduced productivity. Big mergers in other industries have also been costly — DaimlerChrysler, AOL-Time Warner, Boston Scientific-Guidant, and Citicorp-Travelers, to name a few.
Business combinations on a smaller scale are often more successful than big mergers. A company may string together a series of smaller acquisitions to build a new business, as IBM has been doing in data analytics. Or it can use alliances and partnerships to gain access to external resources without owning these resources at all. Even Merck, long a holdout on the partnership trend in pharma, now appears to be looking to leverage external relationships.
The opportunity for big mergers may also be drying up in many industries. Last year, the merger of American Airlines and USAirways almost failed to get approved by anti-trust authorities; it may well be the last big one in that industry for a while. The telecom industry also seems close to its limit in large mergers. A bid by Sprint for T-Mobile may test that limit this year. Other major industries, like computers, media, autos, chemicals, oil, and financial services are not far behind.
It is not surprising, then, that Google searches for business news using the term “mergers” peaked in 2008. But while interest in mergers has declined, interest in “acquisitions” increased, as did interest in “alliances, partnerships, and joint ventures.” These smaller-scale alternatives to mergers also remix assets, and often with a different strategic intent.
The years of the Great Recession saw many big mergers aimed at restructuring assets and cutting costs. Indeed, Google trends show an increase in searches for business news on “efficiency” right after 2008, but by now this interest has levelled off. Interest in “innovation,” on the other hand, has risen more strongly and continues unabated.
Big mergers may help cut costs, but more nuanced strategies are needed to drive innovation. IBM’s surveys of top executives have picked up on this trend. The share of CEOs who expected to use partnerships for innovation rose from 55% in 2008 to 69% in 2012. CEOs of better performing companies were more likely than those of lesser performers to see partnerships as a way to break into new industries or to create new ones.
As the business remix picks up in 2014, therefore, its forms will be more varied than before. And therein lay serious challenges for managers. How do you choose among the many options? How do you manage the variety of deals? Which deal gives the most bang for your buck? Good questions; watch this space for the answers. (Full disclosure: I am completing a book on this very topic.)
Those giddy investment bankers, of course, have an interest in seeing more big mergers. So, beware of pundits calling out trends that favor their own view of the world. (Author included.)