Maintaining Market Power Online

In an age of rapid digital disruption, how can you retain market power and continue to prosper online?

There is a lot of misinformation and confusion about how to compete in the digital landscape, and one of the points of confusion is about the power and value of content.

There is a new company called The Grid, which you may have seen advertised on Facebook, which is planning to sell AI websites that design themselves. The company’s tagline is “content is power, power your content on The Grid.”

The company argues that if we each had our own unique personal corner of the web, then the Internet would be a better place. This is a compelling sales pitch but it also conveniently ignores the way that market dynamics work online.

As I highlighted yesterday, the Internet creates winner take all dynamics whereby companies that can establish brand recognition, sufficient scale and strong network effects will often be able to dominate their market segment online.

Consider also the fact that companies like Narrative Science have managed to produced natural language algorithms that can create high quality pieces of writing. This technology has the potential to put most journalists out of work and, perhaps a little bit further down the line, lawyers and technical writers too.

Content is not power, but if it can be used to connect with people and bring them together in a scaleable way then that would be powerful indeed.

Mergers & Acquisitions: Strategy

MERGERS have had a ubiquitous presence in the news recently as leaders in the airline, publishing, and telecommunications industries have taken steps to consolidate. Just this week, two of the largest advertising entities, Omnicom and Publicis, announced a $35.1 billion merger. In recent months, tech giants Google and Yahoo have acquired dozens of companies, most notably Waze and Tumblr respectively.

Despite the frequency of these deals, a large number of market studies have indicated that “50% to 70% of mergers and acquisitions fail to create incremental shareholder value”. As a result, consulting firms have an opportunity to provide valuable expertise at each step in the M&A process with the goal of preventing these failures.

One of the most vital components of a successful acquisition is the financial valuation: determining the value of the target and ensuring that your client avoids paying too much. However, determining whether the acquisition would be a good strategic fit is the first step.

Clarifying why your client wishes to undertake the acquisition is a good place to begin, both in a case interview and in a real-life consulting engagement. Potential rationale’s for pursuing an M&A deal include:

  1. Performance Improvement: restoring performance of the target company through revenue growth and cost cutting,
  2. Growth Potential: picking winning early stage companies and helping them develop,
  3. Market Access: increasing market access for the products of the acquirer or the target,
  4. Market Power: removing excess capacity from the industry,
  5. Capability Acquisition: acquiring new production capabilities, skills or technologies more quickly or at lower cost than would otherwise be possible,
  6. Synergies: achieving revenue synergies or cost synergies not available to the target or acquirer if acting alone,
  7. Business Transformation: using the merger as a catalyst to change the combined entity into an entirely new company, for example, with new strategic focus, organisational structure, key processes, etc. According to McKinsey, transformational mergers are rare “because the circumstances have to be just right, and the management team needs to execute the strategy well.”
  8. Bargain Price: buying the target at a price below the target’s fundamental value. The ‘bargain price’ rationale is also rare since the acquirer typically has to pay target shareholders a takeover premium in addition to the target’s current market price.

Regardless of the reasons concocted by management to justify action, the vast majority of acquisitions should never take place. Due to the high failure rate and inherent problems arising from the attempt to consolidate distinctly different organisational cultures, the most valuable advice a consultant can give might be to persuade senior management not to become seduced by the allure of a potential acquisition. In the long-term, managerial decisions should support the creation of shareholder value.

Next week I will introduce the various methods consultants use when conducting a financial valuation.

Merger and Acquisition Strategies adapted from Management Consulting: A Guide to the Profession, edited by Milan Kubr and published through the International Labour Office.