2,524 crowdsourcing and crowdfunding sites
M&A (mergers and acquisitions) are some of the most popular, high-profile transactions that business leaders engage in. Compared with an IPO (Initial Public Offering), which is generally a one-off in the life of a company and frequently in the life of an employee, M&A happen much more frequently and in many more companies. In the technology industry, many employees experience several such transactions in a few years.
Here’s the wringer: M&A generally fail. That’s not anecdotal — it’s backed by research. A recent report from three UC Berkeley professors for the National Bureau of Economic Research concluded that where there was a bid for a target company, companies that won the bid and acquired the target underperformed peers by 50% over three years. That’s just one recent example of research that demonstrates that M&A suck. Sure, bidding situations introduce the “winner’s curse,” and some suggest that M&A’s bad reputation is skewed by outliers such as the infamous AOL-Time Warner debacle. So let’s take a look at a company we all know: Google.
Google is a famous serial acquirer, completing 120 acquisitions since 2003. Of those, 79 were completed in 2011. How’s that working out for the web behemoth? David Lawee, Google’s VP of corporate development, says that one third of Google acquisitions fail (and that’s what he says publically, so take it with a pinch of salt). That includes Google’s $182M acquisition of Slide in August 2010; Google killed the service just one year later. It is his job to make these succeed, so it’s big of him to concede that many acquisitions fail — even if what he’s really saying is that Google is a better-than-average M&A player, which may well be true. Based on Lawee’s self-reported results, why are over 30% of Google’s M&A deals — amounting to hundreds of millions, perhaps even billions, of dollars — lemons?
One fascinating study by Georgetown law professor Donald Langevoort shows that CEO over-confidence drives M&A. In a similar spirit, Stanford professor Jeffrey Pfeffer argues that correlation between company size and executive pay incentivizes CEOs to expand their companies regardless of financial consequences. (Power, Harper Business 2010, p.93-4) In other words, executives are often incapable or unmotivated to see a bad deal when they’re staring at it (I’m interested to know if someone, anyone, told Zuck that $1 billion for Instagram was a total waste of money). M&A are generally shrouded in secrecy, with the result that a handful of people who get paid to manage M&A — and whose compensation is not tied to their outcomes — are not particularly driven for successful outcomes, just for outcomes. To rephrase, M&A are generally concentrated in the hands of a few individuals with misaligned incentives and limited perspective on the success of M&A.
It’s no surprise that this industry has been waiting for the power of the crowd. “Despite the abundance of published material on mergers,” write Dennis Carey and Dayton Ogden in The Human Side of M&A, “the world of merger strategy and tactics remains highly secretive.” (Oxford University Press 2004, p.5-6) In other words, the M&A industry has been treated as if it has a secret sauce passed between generations of M&A bankers, but that is demonstrably false. “Roughly two-thirds of all mergers end up destroying shareholder value, meaning that the acquiring company would have been better off never making the deal,” notes crowd guru James Surowiecki in The Wisdom of Crowds. “Mergers involve a yes/no decision. They are, as a rule, decided on and initiated by the CEO (and rubber-stamped by the board of directors). They have a relatively clear outcome. And most of the time, making the deal is the wrong decision.” (Anchor 2005, p. 218)
So how can crowdsourcing change all this?
There are three main ways: First, crowdsourcing can help realign the interest of stakeholders and companies in M&A. Second, companies can improve the outcomes of their M&A by embracing the wisdom of the crowds. Third, crowdsourcing M&A ideas and intelligence should result in a healthier environment for innovation.
M&A affect all stakeholders in a company, but the ones who make the deals happen typically care least about the consequences. Executives, boards, corporate development groups, bankers, accountants and lawyers all get paid irrespective. It’s the shareholders and employees who suffer most and whose opinions count least, and they get their information from the company. Investment bankers’ “fairness opinions” are what boards and consequently shareholders rely on to make their M&A decisions, and even these have been shown to significantly overvalue targets for acquirers. Crowdsourcing M&A deals means the parties benefit from the insight, intelligence and information of the crowd of interested people, not just a handful who ultimately don’t care if the deal works.
Though there are legal and regulatory issues around M&A — specifically, M&A rumors and announcements can affect stock prices and are rightly insider information — there is often excessive secrecy that shrouds poor performance. Lawee’s admission above is extremely rare and refreshing. By being more open about M&A, companies can benefit from the thousands of people who want to help them succeed.
By inviting broader participation in M&A, transparency will increase. Innovators will be better clued-in to what investors and industry are looking for, startups will be better matched to acquirers, and there will be less wasted investor money and entrepreneur brainpower.
Crowdsourcing has the potential to drastically improve M&A. It’s a disruption whose time has come.
Ayre Schreiber recently founded Merjerz, which improves M&A outcomes by leveraging the wisdom of the crowd. Previously, Schreiber was vice president of business development at Lightech Electronic Industries, an Israeli clean-tech company acquired by GE last year.