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BLOG@CACM

Inorganic Growth In Tech: Getting Shredded with Acquisitions

By Doug Meil
January 3, 2023
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Doug Meil.

Want to be Bigger? Faster? Stronger? Such questions are a staple in exercise and health media, but those same questions are raised in the tech industry as well. A business phrase currently in vogue is "evaluating organic vs. inorganic growth." Organic growth, simply put, is growth through an extension of existing business operations. Inorganic growth happens through acquisitions. Both approaches have strengths and weaknesses, but this post will describe challenges in the latter approach because acquisitions happen quite often in the tech industry and are far more complicated to pull off successfully than just popping a pill.

Rationalizing Tech Acquisitions

Why Buy?

Business cases for acquisitions fall generally between products, technology, and people, and the lines can be a bit fuzzy between these categories. Products imply some technology, but most importantly they imply a thing that can be sold, a customer-base, and revenue. When people make a case for a technology acquisition, it means the acquisition has something cool or useful in the eye of the beholder, but may not necessarily have customers or revenue. People acquisitions are the blurriest of all as the new staff could be for things like product development or services, but either of those tend to be about future potential returns on projects, instead of a current asset.

In terms of products, it's easy to forget that Google actually acquired YouTube (2006), and Microsoft acquired Forethought (PowerPoint, 1987), as well as Visio (2000), as it feels like those offerings have always been in their respective portfolios. As for technology, Apple acquired FingerWorks (2005) for key components for the first iPhone, and while Microsoft didn't acquire Seattle Computing Products, the license deal it struck for DOS in 1981 for an absurdly low amount is already the stuff of legend, though that story is undoubtedly less legendary from SCP's perspective. These are just a few examples of acquisitions that worked, though admittedly there is some survivorship bias in these cases.

Who Is Buying?

Understanding who is in control of the shopping list is a key variable, especially whether they are in a product development team or in a strategy group (or some variant of "corporate strategy, mergers & acquisitions"). And in large organizations, determining which strategy group is driving the conversation might not be so simple as there may be a several.  Just as product people may have a reputation to "build everything," the opposite can be true for strategy: not only is the default answer to acquire, but the number of deals processed might be a central part of their yearly performance review.

It can be hard enough getting engineering and product management on the same page, much less strategy groups, and it should never be assumed there is a common understanding of portfolio needs. Open and bi-directional communication is essential, because having a strategy team tell a product team "Surprise, we bought you something!  And it only cost $100 million!" can lead to some dramatic scenes once the box is opened.

Managing Tech Acquisitions

The easiest part of an acquisition is writing the check. It's another thing entirely to ingest and integrate it successfully.  Management of an acquisition determines whether the acquiring company will bulk up and get shredded and everybody wins, or the acquisition goes through a shredder and disintegrates.

I Love You, You're Perfect, Now Change

Expectation management is the most critical part of integrating an acquisition, and it all comes down to the business case of what the acquiring company wants, and just as importantly, making sure that everybody in the acquiring company has that same understanding. Similarly, the acquisition needs to be aligned with those goals.

Product acquisitions are arguably the hardest to manage, not the least of which is because there are existing customer bases and revenue streams. Problems often start with a "wanting more, but with less" mindset in the sense that the acquiring company probably wants more customers and revenue, but isn't willing to either increase current operational spend, or worse, wants to decrease it, especially if the acquiring company is just looking for a quick revenue pop. Funding issues aside, the acquisition impacts have a better chance of being contained if the acquisition is managed as a stand-alone unit.

Integrating an acquisition into an existing portfolio requires substantial effort from both the acquiring company and the acquisition and requires coordinated prioritization. For some reason,this fact never fails to surprise. Inorganic acquisitions can work, but the irony is that successful inorganic growth requires innovative organic thinking to execute — including overhauling business processes, technical integrations, and potentially some technical re-architecture that can take years to pull off. It's possible, but these efforts are not for the faint of heart, nor for the short-sighted. This is where most efforts stumble.

An example of trying to optimize on everything at the same time is what happened with IBM's Watson Health initiative, which at its core was composed of multiple acquisitions. I came into Watson Health via the Explorys acquisition, and our charge was to migrate to a new IBM cloud environment, re-write our solutions all based on IBM technologies, and utilize several new IBM components along the way — all of which were irrespective of current customer needs. Plus, integrate with the other Watson Health acquisitions, and don't forget to grow the business and be profitable, preferably now. The prioritization cacophony and confusion was paralyzing, and within about 2 years the Explorys business case was mortally wounded and became an astonishing first-to-worst case study.

Threading The Needle

Because of the number of business development deals IBM performed, it had a surprisingly well-defined acquisition integration process, complete with an integration executive assigned to each acquisition. Integration executives were responsible for coordinating activities such as re-badging of employees, re-banding of job-grades, onboarding training, re-issuing laptops, plus change-over of HR, finance, procurement processes, facilities management (and turning startup offices into something resembling IBM facilities) and a host of other mundane but business-critical topics typically over a 1-or-2-year timeframe. That is a tremendous amount of work, and it is a good thing to have a standard process template as a guide.

With respect to the Explorys experience, the IBM-assigned integration executive was very good.  Unfortunately, the acquisition integration process still needed to work within a broader division-level business environment, and key factors like product roadmaps and other technical direction setting were effectively out of the control of the integration executive. The division-level chaos was too much for anyone in that position to possibly compensate for.

The best advice for an acquiring company is to ensure that the target environment is reasonably stable before throwing an acquisition into the mix.

Changes In Latitudes, Changes In Attitudes

An important organizational concept to understand for both sides of an acquisition is Power Distance, which was initially researched by IBM in the 1960's and 1970's. Even small organizations can have Power Distance problems in communication depending on personalities and leadership styles, but the dynamics get more complex as an organization grows. I had more than a few queries at IBM answered with an ad hominem response about why it wasn't my place to ask such questions, with a distinct sense of "we bought you, so do as you are told." I could live with being regularly reminded "I was at IBM now," which was true as far as it went, but having questions discarded out of hand simply because they were being asked from an acquisition's perspective didn't sit well, and unfortunately the Watson Health results speak for itself. I doubt that experience is unique in industry.

The Importance Of Symbols

I once knew of a software startup that had beer taps in their office, and there weren't any explicit guidelines on usage other than "be responsible." This startup grew into a successful company and was acquired by a large organization. The story I heard was that whether the beer taps would stay after the acquisition became a high-level negotiation point in the deal, even though they probably weren't used all that often; they were a symbol of the startup's trust in their employees. The taps did remain for several years after the acquisition, which was no small feat given the new environment. One day, the parent organization decided to reorganize the facilities and close their original office and move them into a new space. I suspect the taps were silently removed during that transition, but I never did find out about the impact on morale because the people that I knew had left the organization by that point.   

Smaller organizations and startups have more flexibility in terms of benefits for staff.  As a smaller organization it is easier to give things, but it's harder to take away as those things can become symbols in and of themselves. Some benefit-shaving is inevitable after an acquisition, but that doesn't mean that the impact should be trivialized, or the messaging ignored, because whether it is pizza, palak paneer, polos, or pullovers, everybody notices when the freebies disappear, especially when they have become a positive aspect of the culture. The loss of ability to make decisions even of the smallest variety is also when people start wondering if they should start updating their resumes.

In Conclusion

Inorganic tech acquisitions can work, especially if they are managed as stand-alone units.  But successfully integrating an inorganic acquisition into an existing portfolio of products and solutions will require top-notch organic behaviors and is precisely what executives typically think they can avoid when they start exploring inorganic growth paths.  As with health and fitness, there are no shortcuts.

 

References

 

"Shredded"

 

Tech Acquisitions

 

BLOG@CACM

 

Power Distance

 

Musical References

  • "I love you, you're perfect, now change" – musical theater
  • "Changes in latitudes, changes in attitudes" – Jimmy Buffet

 

Doug Meil is a software architect in healthcare data management and analytics. He also founded the Cleveland Big Data Meetup in 2010. More of his BLOG@CACM posts can be found at https://www.linkedin.com/pulse/publications-doug-meil

 

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