Learning from Google’s M&A strategy

Banking sector mergers and acquisitions activity is increasing. According to the Deloitte’s 2015 Banking M&A Outlook, there were 301 separate bank deals in 2014, compared to 247 in 2013, with the prospect of an even higher number of deals in 2015.

Not only the increasing number of deals should have bankers wanting to learn more about M&A. It’s also the challenges that acquiring banks have faced, converting their acquisitions into improved financial performance.

In the same Deloitte report, almost 9 out of 10 respondents to a 2014 survey stated that “transactions completed in the past two years have not generated their expected value or return on investment.”

The reasons for the failure to realize expected value are not unique to banking. Bad strategic fit, poor deal economics, integration pace, and cultural challenges all can work to diminish post-deal performance.

Such reasons for M&A failure are not unique to banking. Are there any industries or companies with a proven track record of success, from which bankers can learn? If you did an internet search today, chances are the answer was staring you in the fac: Yes, it was mergers that helped take Google lightyears beyond the simple search function that started it all.

Google’s M&A engine

Google has a well-deserved—but not perfect—record of successful acquisitions. Understanding how Google approaches identifying potential deals; evaluates and pursues opportunities; and integrates acquisitions can provide lessons for bankers.

One way bankers can gain that insight into Google’s approach, is to read Semi-Organic Growth: Tactics and Strategies Behind Google’s Success by George Geis.

Geis, a professor at UCLA Anderson, offers both a primer on M&A strategy and execution and a thorough analysis of actual deals executed by, primarily Google, but also Apple and Facebook. Geis provides many examples of how M&A concepts and best practices were applied—and, in some cases, ignored.

Taking this on is an ambitious effort by Geis, at which he mostly succeeds.

Class is in session

I felt, in reading Semi-Organic Growth, that Geis was writing for students taking a course on M&A, where the dialogue and facilitated discussion in the classroom would be used to tease-out the deeper strategic lessons.

Even for bankers who are unable to benefit from a facilitated discussion, there is something to recommend, depending on your level of interest in M&A:

• If you’re simply looking for a concise overview of M&A strategy and the dimensions to consider in executing on that strategy, reading Chapter 1, “M&A Success and Failure,” will suffice.

In Chapter 1, Geis reviews the key components (strategy, deal economics, organizational design, and deal dynamics) that influence success. He also discusses how to evaluate performance and the primary reasons for M&A failure. Here he introduces the concept of “semi-organic growth.” This is the term Geis uses for growth resulting from M&A that serves to directly improve product and service revenue.

• If your job role focuses on M&A, or you’re seeking a deeper understanding, Geis provides, throughout the book, helpful guidance, practical tools, and proven tactics that will help build out your knowledge and expertise.

An example of this is the detailed treatment of Geis’ preferred method of modeling the M&A market—completed transactions and potential targets—and in his consistent use of an M&A infographic. Regardless if you have already developed your own versions of these tools, there is most likely something to learn from Geis’ approach.

Augmenting the text, Geis provides access to an online video library, which provides additional context on many of the key topic areas.  

Overall, Semi-Organic Growth is a valuable, if sometimes technical, resource that can be appreciated by both those who are responsible for managing M&A activity and those banking executives who simply desire a high-level overview.

Applying principles to banking

Less obvious is how to draw lessons from the analysis of transactions conducted by Google, Apple, and Facebook and apply them, especially in a very different industry like banking.

There is value in doing so, as the decisions, tactics, and strategies employed by these companies are transferable to banking. While reading Semi-Organic Growth, I kept relating the analysis of these companies actions back to my industry experience and found many commonalities.

Others are likely to draw their own insights from Geis’ treatment of the topic. Here are a few of the observations and questions I thought through, prompted by the book:

• Strategic fit. Much of Google’s success is attributed to its diligence in pursuing acquisition targets with a clear strategic fit. How much then is the failure of banks in realizing expected value from M&A transactions attributable to the motivation for their acquisitions?

Is M&A pursued simply to enter a new geographical area, or to “buy” market share/deposits, a fundamentally wrong approach? If so, how should banks adjust their target identification?

• Leg up for nonbanks. Google, Apple, and Facebook have two advantages not currently available to many banks. They have both significant cash reserves and an investor base seemingly willing to support their taking the “long-view” in terms of realizing value from acquisitions. Google’s acquisition of YouTube is a good example.

In absence of these two conditions, how should banks approach M&A? Does it make the case for strategic fit, especially, with respect to optimizing distributions channels or diversifying revenue streams even more compelling?

• Finding long-term advantageous fit. As banks seek to build out capabilities, where is the “adjacent possible,” as Google exploited in their acquisition of Waze, a crowd-sourced navigation company? What capabilities are natural extensions of banking? Where can banks invest to combat commoditization of their core products?

• In chapter 12, Geis provides a typology for M&A integration, originally developed by Haspeslagh and Jemison in their 1991 work, Managing Acquisitions: Creating Value through Corporate Renewal. This typology addresses the various styles of integration efforts.

The four styles identified by Haspeslagh and Jemison are; Absorption, Holding, Preservation, and Symbiosis. Absorption or the close assimilation of the acquired entity is the most common approach taken by banks.

Given the types of acquisitions banks execute—typically other banks—regulatory requirements, and the expense of operating multiple banking platforms, this makes sense.

If, and as, banks pursue nonbank acquisitions, to what extent will this need to change? And how will existing bank integration processes need to change in support? What will be the cultural and operating implications (e.g., financial management and HR processes)?

Introducing the ecosystems concept

Geis introduces and briefly covers a topic which should be of growing importance to banks, the rise of “ecosystems.” Ecosystems can be classified as influence-based (think Apple’s App store) or control-based (Google’s acquisition of DoubleClick).

While the ecosystem concept is not necessarily a direct M&A topic, Geis’ inclusion of the topic makes sense in the context of this book.

The idea of ecosystems arises from the complexity of delivering products and services that fulfill the needs of customers. Increasingly, banks can no longer do this alone. Fulfilling customer expectations requires a growing level of integration with multiple firms, each providing a piece of the overall solution.  

Ecosystems are, in a sense, partnerships writ large. Geis favors the phrase “ecosystem synergy.” Strategically building an ecosystem and managing the ongoing complexity will not come naturally to banks. It requires advancing vendor selection, integration, and business models beyond current practices.

To be blunt, getting this right goes way beyond arranging a referral agreement.

While this topic is not the primary focus of Semi-Organic Growth, I strongly encourage all bankers to add Chapter 14 (“Competitive Deal Constellations and Ecosystem Synergy”) to their reading list.

What Geis portrays may well be where we are headed as an industry. Does this quote resonate with you?

“Products and services have become increasingly complex and interrelated, requiring an ever-changing diversity of pieces that include technologies, applications, and content, all coupled with design capability. It is extremely rare for all necessary pieces to reside within one organization. [Emphasis added.] An organization can no longer operate in relative isolation, but must be willing and able to operate outside its organizational boundaries to influence or control the necessary pieces to complete a product puzzle.”