Some Acquisitions Leave Opportunity on the Table

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Throughout history, industrial companies have looked to acquisition to bolster market position and accelerate growth.

It is interesting that the rationale CEOs often give for a combination is the very thing they mess up in execution — namely, leveraging capabilities and exploiting synergies. The Harvard Business Review suggests 70 to 90 percent of acquisitions fail. The number one reason? Inability to live up to advertised outcomes.

Management teams routinely overestimate savings and the market effects of portfolio integration. Recently, aerospace and defense consolidation has been on the upswing with the 2018 United Technologies Corp. acquisition of Rockwell Collins, the largest in aerospace history

In announcing the acquisition, CEO Gregory Hayes said the combined company will develop systems that are “more electric, more intelligent, more integrated, more connected and more cost-effective. Imagine the ability to combine these systems, architecture to reduce weight, to reduce cost for the airlines … [the acquisition] gives us the scale to innovate.”
There is nothing wrong with this sentiment, but making it happen is much more difficult.

If companies like UT, Northrop Grumman and others hope to capitalize on the benefits sold to Wall Street, they need to be mindful of the role research and development plays in these combinations and watch for several warning signs.

One of them is unfamiliarity with R&D operations/investments and capabilities. This one is the most troubling, yet it is the most common. Executives simply don’t have a detailed understanding of their R&D ecosystem — what they have, why it is important, or what it will do for them in the marketplace.

Corporations in this situation have forgotten that R&D is a strategic asset and should be managed as such. Often companies of this type are overly tactical in their thinking and occasionally power-politics gets in the way of greater transparency. Integration teams may compile research-and-development data, but they do little in the way of analysis to fully exploit its market potential.

Another problem is the inability to conceptualize leap-forward combinations of capabilities. For some companies, the creative spirit that drives discovery is absent or unpracticed. Innovation most often occurs by combining things in ways not previously considered. Companies that do not exercise their creative muscles should not expect to lead in the marketplace. Usually this is a second-order problem in that one can’t enable innovation without first building a complete understanding of the R&D ecosystem.

Another warning sign is a lack of an integrated R&D operating model that drives strategic intent, accountability and investment. High-performance R&D happens in the context of an integrated model — driven by strategy, supported by business processes and aligned with both resources and organization. Moreover, a high-performing model should be enabled by organizational learning, management-by-objective and effective communications. Those who try to integrate these functions outside of the context of an integrated operating model are deluding themselves.

Also, one must see that “real” levers of post-acquisition efficiency lie elsewhere. Some executives think it is sufficient to focus on those things that support the core function of the business without addressing the core function itself. If they are in the business of developing differentiable products based on technologies, capabilities, and a clear view of the competitive landscape, they had better approach any acquisition in the same way. Why fiddle around with accounting and procurement functions if you can’t figure out how to leverage the technical and engineering resources of a combined enterprise?

Finally, executives must take into account planning functions that are too slow to act. Securities and Exchange Commission rules insist that some planning wait until the transaction closes, but this should not be used as an excuse to do nothing.

Too many companies have not gotten their own houses in order prior to close. This happens all the time: organizations think they are ready but are woefully unprepared and will enter the combination on a less than equal footing.

Executive teams need a clear roadmap of how R&D ecosystems will be integrated and leveraged — the process of developing such a roadmap should begin in advance of closing.
Working the issue post-closing is like figuring out a strategy after it has entered the marketplace. The issues stated above are not insurmountable — their avoidance simply requires a diligent approach.

CEOs tend to think in terms of broad market impact and financial return. Certainly, this is a good starting point, but to really understand value in the eyes of the market one must build competitive advantage from the bottom up.

They cannot frame large-scale market impact without first assembling its constituent parts at the granular level of enabling technologies and capabilities.

A proper investigation should start with a complete inventory of all capabilities along with an evaluation of their competitive strength.

CEOs need to know where the market is going or likely to go. Once those tactical steps are taken, the hard work begins of identifying combinations of skills, capabilities, technologies and products that can leap-frog the competition.

Topics: Acquisition, Viewpoint