Never Acquire Technology You Understand
Updated: Sep 25
By Neil St. Clair
This article was originally published on Forbes.com (November, 2016)
Any mergers and acquisition professional will tell you the first principle of the M&A game is to thoroughly misunderstand the technology and marketplace of the company you are intending to acquire. This thorough misappreciation of integrating the culture and assets of the new firm is a surefire methodology for success.
Oh? You're saying it's the exact opposite of that? That perhaps it behooves "old growth" firms to press pause before buying (or for that matter building) disruptive technology firms? Well now I'm thoroughly confused.
Sarcasm aside, the very fact that you clicked on this article means that you're either a) a wily technology disruptor that gets the inherent dripping-with-click-bait-nature of my headline or b) a 50-something M&A investment banker that took my headline seriously. The good news is I've got something for you both.
What we'll explore here are newly-developed behavioral profiles of tech acquirers as applied to the buy v. build v. partner v. wait debate. These profiles are most intriguing when old-guard firms (think Fortune 500, lots of bureaucracy) try to get tech-hip and enter what I call "The Valley of Technology." This is no fertile valley, but rather a crescent between the mountains of ignorance and greed. Entering the Valley leads to over-enthusiastic and ill-fated decisions to acquire or build technology in order to grow. But in the end, due to a lack of market and technology insight, these decisions turn into a white elephant--the corporate equivalent of the Bridge to Nowhere. Through the example of FinTech's robo-advisors we'll apply a cross-industry logic that says it's almost always better to learn to swim before crossing the English Channel.
The following profiles need to be understood by both supply and demand-siders, and by those on either side of the corporate-disruptor chasm. For those of you non-millienials reading this, likely breathless with fear at the "disruptive" upstart about to eat your corporate lunch, pay close attention. And please also know that my tongue-in-cheek-headline portends the opposite of my true thesis.
Click here to view the full slideshare
Robo-Advisors & The Epochal Supply-Side Cycle
What you'll see in the slideshow linked here is a diagram of a few executive buying personaes that I’ve experienced when it comes to recent tech hype cycles. These are the personalities at the “old-growth” firms that emerge when they’re in the “Valley of Technology.” That is to say, a moment in time where their industry is threatened to be turned upside down by something truly disruptive.
To paint this picture with a real-life example, we'll pull from my fintech experience and look at the advent of "Robo-Advisors." Also known as digital portfolio advisors, "robos" have been the buzz of the flesh-and-blood financial advice industry for the past several years. In short, what they do is automate much of the work performed by human advisors (e.g. portfolio allocation, rebalancing, tax-loss harvesting) for a fraction of the cost.
Robo-advisors, as with any hype cycle technology, are held to three disruptive epochs on the supply-side—the Early Movers (e.g. Financial Engines); the Meat-of-the-Bell Curvers (e.g. Betterment or Wealthfront); and the hyper-specific Late-Bloomers (TBD). At this moment, I’d say we’re on the back-nine of the Meat-of-the-Bell-Curve or 2nd epoch. That is, we'll shortly head to the 3rd epoch of hyper-specific Late-Bloomers.
As a perhaps more relatable analogue, let's look to social media—you have the Early Movers—Friendster and MySpace that usually are ahead of their time and cannot sustain an audience. However, one major early mover does end up dominating. In the case of social media this was Facebook. The Meat-of-the-Bell Curvers are those that saw the Early Movers and said, "I can do that better." They all get the spark of inspiration from the dominant Early Movers' success and begin to build. As such, they cluster together and launch around the same time, fighting a fierce battle for dollars and eyeballs. Think YouTube, Flickr, LinkedIn, Twitter, Google+, Pinterest, etc. etc. They may do something general, perhaps with a twist (e.g. Facebook for Business Professionals =LinkedIn), but typically play in the same ecosystem as the Early Movers. Then you have the Late-Bloomers that say, "I can do what Facebook and others did, but for a specific audience or use case." Think Instagram or Snapchat.
All players are potentially valid, but usually overstuff their marketplace so there’s no true initial dominance or market share. And only a few actually survive. A certain type of beautiful Darwinism played out in a digital Galapagos.
But during these various epochs, which can take years or decades, the old-growth firms get agitated and/or excited. It’s usually during the Meat-of-the-Bell Curve 2nd Epoch that vanguard-of-the-last-revolution firms take notice and realize they’re threatened.
Returning to our robo-advisor example, nobody really trembled when Financial Engines launched in the late 1990s. It was either dismissed or reacted to with bemusement and a condescending pat on the head (Good luck, kid). But when Betterment and its ilk came around, more than a decade later, all hell broke loose. Something was palpably different this time. People seemed ready for "digital" financial advice in a way they hadn't been in the past. You could literally feel the desire of financial services CEOs to conceive a summit on Jekyll Island for a smoke-filled roundtable. Something needed to be done to deal with these upstarts--and fast. But what? The reaction of these FinServ executives to the robo advent begins our journey into the Valley.
Type 1: The Acquirers
The first personality types are the Acquirers. These are the executive folks that during this 2nd Epoch of tech hype see what’s going on and, either through fear or greed say, “I must have this.” In our robo-advisor example, look to relationships developed with Fidelity-Betterment, Blackrock-Future Advisor, LearnVest-Northwestern, etc. Sometimes these are pure-play acquisitions and other times they are cash-laden partnerships that can be dissolved.
Rarely, however, do these early Acquirers make rational choices. Acquisition peaks when the market is high and so are attendant valuations--then it crashes and so do values, but the money is already spent. On the way to this peak Acquirers horde, overspend and then realize they have no idea what they bought or how it provides value to their clients.
In reaction to this, what do they do? They leap from being an Acquirer to a Developer. “This technology doesn’t work for me; I don’t understand it because I didn’t build it. I’ll hire some smart tech guys and build my own.” Sound familiar?
But the same problem remains—the Acquirers still don’t understand the tech or how it applies to their audience, but now they’re doubling-down on the expense in an attempt to find a fix. Often times what is built is simply a lower-cost model to a service the old-growth firm already provides. Incapable of driving new business to their tired brand, they simply cannibalize their existing audience who leap from the higher cost service to the new lower-cost option.
In the case of Fidelity-Betterment this was a partnership that eventually dissolved, ostensibly due to Fidelity not finding any deep value in the Betterment robo model. However, not long after the partnership dissolution, Fidelity built its own robo that, by many estimates, is merely cannibalizing their own client base by offering a lower-cost solution—it’s not providing accretive growth.
For Acquirers, whether they stay on the acquisition path or leap to build, the result is the same. They were either too early or too uninformed and their return on investment is minimal.
Type 2: The Developers
The next personality type are the Developers. They see the tech landscape and say, "I want this, but I don’t trust anyone else to do it." So, they build the thing themselves, usually at a high internal cost. Not just a cost in time and treasure related to development, but often in terms of creating a lower-cost solution that again cannibalizes their own client base. In our robo-advisor example look to Schwab or Vanguard, two of the largest financial services firms. They built their own robo-advisors, which, by most accounts, are not adding growth, but merely shifting assets from a higher-cost human advisor or DIY platform to an automated robo-platform at a lower cost.
Developers see the Acquirers at the peak of the cycle making big moves and their fear of missing out (FOMO) sets in, and this is usually when they begin their development. It gives them something to defend to their board, "Don't worry about BlackRock buying FutureAdvisor, we’re building our own thing."
Over time, the Developers usually balance out the front-loaded time and treasure cost of their tech development with some long-term accretive growth. More often, however, their build is a matter of loss avoidance--that is, avoiding losing market share to more nimble competitors. The Developers leverage their known brand and sticky audience and force out smaller competition. In the end, it’s a neutral proposition for them, but not an accretive one.
Down the road, via the knowledge gained from their build phase, the Developers become Acquirers of tech that they now do understand. The acquisition targets are usually the strongest players that survived the competitive furor of the 2nd Epoch. As a recent example, think of Microsoft’s acquisition of LinkedIn--a major Developer player buying a strong 2nd Epoch disruptive survivor. Microsoft leveraged its experience as a failed Developer to deeply understand what it was getting in LinkedIn. In case you forgot, that failed Developer experience was a social tool Microsoft launched in 2012, aptly named "Social."
Type 3: The Waiters
Finally, we come to the Waiters.
These are the folks that see a hyped-up tech bubble for what it is—they understand their business, audience and technology. In short, they know what they know and what they're good at. They do not give in to irrationality or emotions. Waiters chuckle a bit at the early Acquirers, knowing what’s going to come. At the same time, Waiters are facing pressure from their boards: "Why aren’t you doing anything? You need to buy or build one of these guys now!" And yet, still they wait.
Waiters take a look at the Developers and consider building something. They receive the same pressure from an incredulous board. But still, they wait.
In the end, once they’ve scoped the industry and performed due diligence on a variety of the strongest remaining players. Once the fly-by-night players have been eliminated, they shift the Acquisition and Development curves to their favor in a market that now favors buyers and not sellers.
The Waiters get to decide if they will buy, build or do nothing. They miss the overhype and get to understand the pitfalls and providence of the disruptive technology, and how it can fit into their business model. In the robo space we haven’t yet seen the results of the Waiters as we’re still mid-hype.
Often times the Waiter will pass through the 2nd Epoch without action and focus on acquiring a 3rd Epoch firm that has a hyper specialization. This specialization speaks to a specific sleeve of business development for the Waiter that they had been unable to fully unlock.
In social media terms, think of Facebook. It understood the social ecosystem deeply, because it was the social ecosystem. It waited and watched rivals like Google's Google+ wither. It could have acquired Twitter or even LinkedIn or developed competitors to them. But Facebook knew its model, and finally decided to acquire 3rd Epoch social tech in the form of Instagram. A visual-first micro-content platform, Instagram has provided accretive value to the Facebook business model by tapping into a younger set of millennials that were abandoning Facebook.
In the end, the Waiters tend to show the highest return on investment (sometimes just in the form of blind cost avoidance relative to their overpaying Acquirer and Developer competitors)—proving the maxim that patience is a virtue.
The one form of personality type we have yet to discuss are the "Partners." This is to be most stringently avoided. Partners are the indecisive personalities that can't make up their mind whether to buy or build, and likely will do neither. They will demur and appear to be Waiters but will never make a meaningful move or even a decisive non-move. Instead, they will Partner with every manner of disruptive technology that exists and put them on a "platform" for their clients/internal business units believing they're providing value. In the end, they're providing confusion and an over-abundance of options that freezes their clients or internal business units from ever making a true choice.
In the end, hopefully my thesis is clear. Unless you truly and deeply understand the needs of your audience, it's best to be patient and then apply a rational litmus test to determine the personality you will present to the marketplace. If you are not a rational Waiter, you may end up in the Valley of Technology as a loss-leading Acquirer and Developer.
Neil St. Clair is a respected social entrepreneur, journalist, and philanthropist. He is currently CEO & Founder of social change consultancy, NES Impact as well as fear-focused venture studio, Notimor. An advocate for children and gender equity, he founded and chairs The NextMen Foundation. Follow him on IG @neilstclair