M&A and the Product Model
By Marty Cagan and Thomas Fredell
Marty’s Note:
My co-author for this article is the transformation coach Thomas Fredell. I have known Thomas for more than a decade, and have watched him guide multiple companies through successful transformations to the product model. In the book TRANSFORMED we profiled one of those companies, Datasite. Thomas is now a full-time product coach, specializing in working with senior leadership teams on the necessary organizational and cultural changes.
M&A as a Growth Strategy
Mergers and Acquisitions (M&A) are a popular part of the corporate playbook to try to grow revenue, and can play a key role in value creation for large companies, but Harvard Business Review estimates that 70% or more of M&A deals don’t generate the expected results. 1
In this article we’re going to talk about the underlying reasons for so many failed acquisitions, and the role that the Product Model can play in helping to ensure a successful outcome.
Sometimes M&A can be a dream come true.
Google hit the jackpot with their acquisition of Android for $50M in 2005, and YouTube for $1.65B in 2006. Today it’s estimated that over 70% of smartphones globally are Android phones with Google generating over $50B revenue per year thanks to Android. And YouTube now contributes more than $25B per year.
But these successes are unfortunately the exceptions, as all too often, M&A can be a nightmare.
Yahoo’s acquisition of Tumblr in 2013 for more than a billion dollars is a case in point. Yahoo promised “not to screw it up,” but they did. Yahoo wrote down the value of Tumblr in 2015 and 2016, and finally threw in the towel with a fire sale to Automattic at a sales price reported to be below $3 million.
Other notable disasters include Microsoft’s $7.6B Nokia acquisition (which resulted in a $7B write-off), HP’s $11B acquisition of Autonomy (which resulted in a write-off of more than $8B after just a year, as well as ongoing litigation), Verizon’s $4.4B AOL acquisition and $4.5B Yahoo acquisition (both bundled and re-sold to the private equity firm Apollo for $5B), and Snap’s $213M acquisition of Zenly (subsequently shut down).
Unfortunately this list could go on for many pages.
If you’ve been part of a leadership team that’s lived through a failed acquisition, either from the acquirer or the acquired perspective, you know how painful it can be to watch these issues play out.
The Root Cause of Failed Acquisitions
So why do so many M&A deals go bad?
There are any number of potential reasons, but there are a few all-too-common problems that we think are at the core of so many of the failures.
But first, it’s important to recognize that sometimes a parent company is acquiring either the employees (referred to as an “acquihire”), or the customers, and has no intention of carrying the products forward. If this is the purpose, then this is a very different goal, and this is usually priced into the deal (a much lower valuation).
This article is discussing the challenges of M&A for growth.
Most companies understand that they are buying one or more products, and that they need to understand the situation with those products – what does it cost to produce, market and sell those products, how much revenue do those products contribute, and are the customers happy with those products? This is what typical due diligence focuses on.
There’s virtually always a due diligence stage. In the diligence stage, typically several aspects of the target company are examined including financial, legal, operational, and usually to a lesser degree, product and technology.
While assessing the current product is important, what most companies fail to understand is that much more important than the products they are buying, is the organization’s ability to develop new products going forward, and more generally, for those new products to be successful as part of the acquiring company.
Assessing these factors requires a much deeper form of due diligence, one that assesses the product and technology organization, including the product leaders and the product teams, how they produce new products, and how they get those products to market.
So how do you avoid bad M&A deals?
While there’s never a guarantee that a deal will succeed, you have tools at your disposal to stack the deck in favor of success.
Avoiding Deal Fever
To start, you’ll need to avoid falling victim to “deal fever.”
So many deals go wrong because leaders can get overly excited about a deal, and rush through diligence because they’re feeling desperate to get the deal done.2
At the diligence stage it’s important to be mindful of confirmation bias. The acquirer wouldn’t be at that stage unless the target was promising, and held potential to achieve a value creation hypothesis—but it’s very easy for deal fever to overshadow diligence.
There are many ways to stave off deal fever at that point, including: red teams (anti-deal “devil’s advocates” who attack the deal hypothesis); cross-functional expert engagement; clearly defined decision criteria; scenario planning and stress testing; “walk away” disciplines; external advisors; and fostering a culture of healthy skepticism.
Most people experienced in due diligence have a reasonable understanding of assessing the product – the customers, the financials, the offering, the technology used to build that product, and especially the go-to-market for that product.
Yet these same people often do not have the experience to understand what it will take to integrate the newly acquired product with the parent company’s existing systems and operations, or migrate the customers to the existing company’s systems, or in many cases, especially in cases of significant technical debt, to re-platform the product, or to change the product to work effectively with the parent company’s go-to-market channels.
It is very easy to assume synergies that will never pan out, or dramatically underestimate technology integration challenges, not to mention the possibility of very fundamental cultural mismatches.
Assessing The Product and Technology Organizations
A robust, objective, and competent diligence process, coupled with a solid product integration strategy, can both help to avoid costly mistakes, and ensure a successful acquisition.
More generally, beyond assessing the current products, even more important is assessing the organization’s ability to create new product.
This is about assessing the product teams, the product leaders, and the product culture of the company being acquired.
We refer to this as a product organization assessment. We provide an example of the assessment we use ourselves in the book TRANSFORMED.
No organization is perfect, but we need to understand what would be required in order for the company to create and modify the products that the acquisition is betting on.
Whether you use our assessment, or create your own, these are the areas you need to be sure you’re covering:
- Is the organization good at building and deploying products? Can they release quickly, frequently, and consistently? Can they respond rapidly and competently to urgent customer issues? What is the level of tech debt? How are they managing the level of tech debt?
- What type of product teams does the company have? Are they delivery teams, feature teams, empowered product teams, or something else? What is the level of ownership and accountability demonstrated by the members of these product teams?
- How do the product teams solve problems? Are teams empowered to determine the best solution for the problems they’ve been asked to solve? Do engineers, product managers and designers work together to understand and solve customer problems? Do product teams engage directly with customers? Are they focused on achieving outcomes, and do they quickly test and learn along the way? What is the level of trust between the stakeholders and the product teams?
- How does the product organization decide what areas to invest in? Do they have a compelling product vision? Is there an insight-driven product strategy? Is the work done by the product team tied back to outcomes, and are those outcomes tracked?
Note that it’s important that you have realistic expectations. It’s likely that the product organization is not strong at all aspects of the product model. Most companies still need to transform to the product model so they can consistently innovate to deliver results like the best of companies.
The question is, what would it take to move the acquired product organization to the product model? By doing the product model assessment up-front, you’ll have a much better sense of what will be necessary post-acquisition.
M&A as a Transformation Strategy
Thus far we’ve discussed M&A as a growth strategy. But sometimes a company is acquired as part of a transformation strategy.
Maybe your company, the acquirer, is stuck with an old product culture, struggling to innovate and create products your customers love yet work for your business, and you’re pursuing this acquisition in the hopes that the culture and methods of the more innovative acquired company will serve as a catalyst and spread to your broader organization?
It is true that one way of piloting the product model is to acquire a smaller company that has already proven their ability to consistently innovate, and then try to use the acquired company as a way to prove out the new model to the rest of the company.
While well-intentioned, all too often what ends up happening is the reverse. The innovative company is the one that ends up buckling under the weight of the acquiring company: innovation slows down, the best people leave, customers realize the new owner is no longer able to meet their needs, and the product is no longer the attractive asset it once was.
Some acquisitions manage to avoid this fate, but it takes real leadership and commitment from the very top of the parent company to protect the acquired company and its culture.
Failed acquisitions are largely preventable, but it does require capable and experienced product and technology leadership to usefully assess both the company’s products and the organization that produces those products, and to craft a product integration strategy that delivers on the potential to the acquiring company.
