Networks and Value Networks – the Case for Enlightened M&A

According to Scientists, as James May might say, roughly ‘x’ per cent of acquisitions (for values of ‘x’ between 40% and 90%) fail to deliver shareholder value (the share price doesn’t go up enough), royally hacking off our post-human, program-trading algorithm successors and the folks whose bonuses depend on them.

One way or another I’ve been involved in Mergers (whatever they are) and Acquisitions
(trading ownership of share capital, with strings attached) for almost a quarter of a century.  And I have no idea how Scientists arrive at these conclusions, but they don’t altogether surprise me.

Acquisitions are often a thinly rationalised ego trip for a deal-junkie CEO,
which ‘independent’ boards seem happy to challenge vigorously and then waive through.
They also tend to be intrinsically and contagiously hierarchical – “We bought you, dipshit,
can you not recognise our collective genius?”. Deal fever means overpayment is rife, but
much less easy to spot without hindsight than you might think. Slightly more perniciously,
wilier CEOs curry shareholder favour by acquiring the wrong companies for a bargain
price rather than ‘overpaying’ for the right company. (Valuing companies, you may by now
have guessed, is financial voodoo in spades). And finally, even if the company is the right
one, bought at the right price, an overly simplistic view of the new business and culture
leads to the pursuit of ‘synergies’ that break business models (and innocent peoples’

Fortunately, I’ve been party to many truly rational and successful business combinations, but I’ve also experienced first-hand examples of every single one of these gaffs. And it’s the widespread, pathological notion that an acquired business is some kind of plaything for the new overlords which has the potential to be the most destructive.

‘Company’ – from cum panes – people who break bread together. How,
honestly, does buying some ‘shares’ convey the arrogant notion that such a collective has
somehow also been ‘bought’, like a pencil sharpener?

It’s interesting that recent years have seen networks come to the fore as an often effective
challenger to the hierarchies that have dominated the business landscape since the
industrial revolution. Writing in ‘the Power of Pull’, John Hegel and John Seeley Brown,
researchers at the Deloitte Centre for the Edge, set out the case for a networked approach
to business architecture as a necessary solution to what they see as the structural decline
of the ‘push’ models of industrial organisation that we have been used to. Similar ideas
are manifested in some of the peer-to-peer and distributed innovation models which
have emerged, and in Reid Hoffman’s LinkedIn platform. Duncan Watts and others have
demonstrated how cross-hierarchy connections and ‘small world networks’ can vastly
increase communication effectiveness.

A genuinely strategic approach to M&A is necessarily founded on a networked architecture
for business combination. Crashing two businesses together into a single ‘value chain’ is
a rational thing to do in some cases, but is the exception, not the rule. Instead, a ‘value
network’ is created by carefully teasing out linkages between the complex and organic
webs of activities that comprise individual businesses, carefully and systematically building units of competitive advantage unavailable to them in isolation, but without damaging their existing positioning. It’s hard work, and it requires buy-in – synergy by pull – as individuals perceive how mobilising resources from their sister company can give them an edge. It also requires compromise, and the Devil is always in the detail.

All two often, historically, the C-suite has been a playground for chest-pounding alpha’s.
More enlightened leaders view themselves as being there to serve their people, as well as
their shareholders, because the company is not, in fact, a pencil sharpener, and their own
success can only come about if the people of the company collectively succeed.

Similarly, M&A has too often been seen as a dominance game. An enlightened leader
will shepherd businesses together into a commonwealth, a value network, and create
the conditions for linkages to happen that strengthen differentiation or reduce collective
costs. As more enlightened enterprises adopt ‘pull’ models that empower engaged and
entrepreneurial, networked employees, such value networks may become more and more
like emergent creations than designs.

Either way, it is high time that value network thinking moves to the forefront of M&A


References and further material

The Power of Pull, John Hagel III, John Seeley Brown and Lang Davison

Six Degrees: the Science of a Connected Age, Duncan Watts

Connect and Develop, Inside Proctor & Gambles New Model for Innovation, Larry Huston and Nabil Sakkab

Competitive Advantage, Michael Porter

The Start Up of You, Reid Hoffman and Ben Casnocha

P2P Business Models, P2P Foundation

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