Cherry-picking

You could say it’s in our interests at OPUS for businesses to be reminded at every opportunity just how important and valuable their intellectual property rights are and they should be protected – registered and insured. We admit it. It is. And we’ll keep banging that drum. But we say it for good reason because increasingly, IP is the key asset that motivates acquisition. And for the IP holder that’s an opportunity to encash the sweat and toil of development and innovation or partner-up for the next level of growth. On a good day – it’s both.

Why buy?

Here’s the theory. It’s quite simple really. Buying a tech business or any innovative disrupter business allows the acquirer to obtain skills and technologies faster or more cheaply than they can build them. Royalty payments and potential costly patent infringement litigation is avoided, and competitors are beaten to the chase.

Take Apple. It’s acquired around 100 companies in the last six years. One a month to save you the maths. Some are high profile and expensive like Beats Electronics, Siri or Shazam. But most are not. Apple buys a number of smaller technology firms and simply incorporates their innovations, quietly, into its own products. The list of Apple acquisitions is surprisingly diverse and includes payments platforms, AI (obviously) and even podcasting. It’s a clever strategy because by comparison to other ‘monster-sized’ companies such as Microsoft, Amazon, Cisco and Facebook, the acquisition costs are ‘small potatoes’ and carefully targeted by Tim Cook’s team.

Strategy defined

The simple acquisition of tech and IP maybe a growth strategy but it needs more according to management consultants.  Winners need to be picked early and helped to develop, ideally before others have seen their potential. McKinsey & Co. cite ‘innovation through acquisition’ strategy as one of six archetypes but for it to work, it needs:

• Foresight – spotting potential.
• Willingness to invest.
• Multiple bets – some will fail to deliver.
• A nurturing environment post acquisition.
• Sensible purchase price.

Deloitte observe:

“Increasingly, companies are adopting inorganic growth strategies to create…”businesses of tomorrow” through M&A  and corporate venturing…innovation-led growth can provide companies with advantages well beyond revenue growth, allowing them to attract talent, increase customer loyalty and command premium margins.”

So, grabbing innovative IP when a big-corporate can, keeps it in the disruption game by proxy. Globally, Deloitte’s record that in 2016, companies spent $219bn on disruptive innovation-related M&A deals a fourfold increase on the $72bn spent in 2012. And the graph continues to point forever upwards. The geographical hotspots are where you’d expect them in China, Japan and the U.S. but also in the UK, Israel and India. Evidently, there is no shortage of buyers for IP-rich smaller businesses.

Sour gapes

If you’re an entrepreneur innovator and inventor and selling your IP is not all about the money, you might want to cast an eye to the future with your new dance partner. Some commentators are starting to suggest the innovation-through-acquisition model doesn’t always work.

They suggest big businesses acceptance of its own inability to innovate is only half the battle. All too often it acquires a smaller disrupter business and continues, unintentionally, through its internal processes and desire for control to kill off creativity. There are many examples of larger acquiring businesses failing the business it bought and writing it off after a few years. Cisco and Pure Digital is but one. There are four problem areas.

Forced Integration

Agility and opportunity are all too often casualties of inflexible big-business processes. These processes are baked in. Don’t expect change.

Distrust

Who are these guys?
Forced collaboration, lack of knowledge of the others business and high expectations can rock trust to its core.

Power games

Lionising the acquired management team and its products can demotivate the existing team to respond with progress-blocking procedures. It’s the only tool they think they have.

Start-up arrogance

Being bought-out for a significant sum of money can cause heads to swell and false assumptions of need and importance.  Not easy to manage but if it’s not, the talent will walk.

Murray Fairclough
Development Underwriter
OPUS Underwriting Limited 
+44 (0) 203 920 9985
underwriting@opusunderwriting.com
Written and researched by Ben Fairclough