I hope everyone has a wonderful holiday and fantastic New Year! See you all next year.
Month: December 2015
Anatomy of the perfect acquisition
This is hopefully not a spoiler for anybody, but Disney will make a lot of money from Star Wars. While most of you will put this statement down as one of the most obvious things you heard in 2015, the reality is most companies do not make money from acquisitions. Although there are no firm figures, an article in Business Insider showed that 50 to 90 percent of M&A (mergers and acquisitions) deals failed to meet their financial expectation; in my experience the reality is probably closer to the 90 percent number as creative accounting hides some of the failures.
Even with these numbers, you can initially write off the success of Disney’s acquisition of Lucasfilm as just luck; even though the majority of M&As fail, some do succeed. Upon further review (as we like to say at this point of the NFL season), however, it becomes clear that Disney has instead used acquisitions to create hundreds of billions of dollars of value.
- Disney’s acquisition of Pixar has led to multiple billion dollar franchises (from Toy Story to Cars)
- Disney’s acquisition of Marvel has helped them created multiple billion dollar film franchises (Avengers, Iron Man, Captain America, Guardians of the Galaxy)
- Disney acquisition of ESPN has created a cash machine that largely drives Disney’s profitability (despite a recent slowdown)
So why was the Star Wars acquisition destined to succeed, while so many acquisitions by other companies are doomed to fail? It is due to a combination of investing in the acquisition, understanding the underlying value of what they bought, finding real synergies with other parts of their business and true efforts to retain and build the team.
Investing in the acquisition
When many companies make an acquisition, the cost of the acquisition is often seen as the primary cost. The acquirer is looking at the acquisition to contribute to its business rather than requiring additional investment. Many companies are acquired because they are growing but growth is not easy or automatic. They are often growing because of internal investment in their business. When this internal investment is diverted to the parent company, it moves the company off the growth path.
Star Wars is a great example of how Disney does things differently. Rather than trying to recoup the $4 billion it paid for Lucasfilm by squeezing the Star Wars franchise to get the most revenue from existing Star Wars revenue streams (e.g., toy sales, new distribution of the past movies), Disney invested an additional $400 million to create two new movies. Not only will this investment more than pay for itself (the movie is on its way to generating $1 billion) it reinvigorated sales for the IP overall. Continue reading “Anatomy of the perfect acquisition”
When to reinvent your company
There was a great article in the Harvard Business Review, “Knowing When to Reinvent” by Mark Bertolini, David Duncan and Andrew Waldeck, that does a great job of showing the indicators of when you need to reinvent your business. Although Bertolini is CEO of Aetna, the insurance company, the lessons are very relevant for game and technology companies.
In my twenty plus years in the game industry, I have seen many great companies fail because they waited too long to reinvent their business. You can look at companies that missed the shift from PC to console (the Infogrames and CDVs), the transition from console to free to play (the THQs and SEGAs), or the transition from Facebook to mobile (the Zyngas and PopCaps). Conversely, I have seen many fail when they lose focus and chase the cool shiny object too early (the NeoGeos and Playdoms).
Bertolini, et al., first make the point that “no business survives over the long term without reinventing itself.” While nobody argues this point, knowing when to start a deliberate strategic transformation is extremely challenging. There are several obstacles to such a change:
- Employees feel threatened;
- Customers can be confused or alienated;
- Investors see uncertainty and often punish what they consider higher risk.
Ironically, the better a company is doing, the harder it is to pursue strategic reinvention. Investors (i.e. the stock market) are happy with current performance. Although they may prefer a wait and see attitude, that can often lead to reinventing yourself too late (which happened to Borders and Blockbusters).
To understand when you should start the process of reinventing your company, the article’s authors define five fault lines that show the underlying business is less stable than it appears. The fault lines focus on business fundamentals:
- Is your business serving the right customers and using the appropriate performance metrics?
- Is your business positioned properly in its ecosystem and using the best business model?
- Does your business’ employees and partners have the needed expertise?
These three areas lead to five fault lines that show if your business needs reinventing. Continue reading “When to reinvent your company”
Don’t undervalue time
A colleague recently made a strong case on why he should spend a few hundred extra dollars to fly into a more convenient airport, and his argument was so effective it helped me realize how much money is wasted in efforts to save money. In particular, people often undervalue (or do not value at all) their own, employees’ and colleagues’ time. As someone who started his career as an entrepreneur, I find myself even more guilty of this mistake.
Although everyone understands their time has value, we often do not realize the extent of this value or think to apply it to many situations. It is, however, pretty easy, to look at the cash value of your time. Let’s say you earn $50,000 a year. Without overcomplicating the equation to take into effect holiday, overtime, etc., you can divide 50,000 by 52 to estimate a value of $961.50 per week. You can then divide $961.50 by 5 to get $192 per workday. Then divide that number by 8 to get your hourly value, in this case $24. If your salary is $100,000 double the number, $150k, triple, etc. You should also perform the same calculations for members of your team (I would also keep the data handy).
If you are an entrepreneur, you can estimate what the salary would be to get someone to do the same work (of course, they would never be as good as you but at worst you are then just creating a conservative estimate of the value of your time). Once you understand how much your time is worth, you can then look at different activities and make more rational decisions.
The first area where understanding the true value of time has a major impact is business travel. There are two different ways this analysis should impact your travel: it can help you choosing routes/schedule and whether to travel at all.
First, as in the situation I mentioned above, it may be a better value to choose a more expensive ticket. If you have a salary of $100,000 and route A costs $500 gets you into the office at 9 AM, and route B costs $350 and gets you in the office at 2 PM, route A is the better option. Yet many companies travel policy and just overall company philosophy might push you to route B to save $150. The problem is, that $150 is costing you $240, based on the calculation above, so route B is actually $90 more expensive for your company. You are being frugal by selecting the more expensive travel.
Second, you need to decide whether the trip is worthwhile. Rather than simply looking at the cost of the trip versus the expected benefits, add in the cost of your being out of the office. This can simply be travel time if you expect to be 100 percent productive while traveling or it can be the full time of the travel. Thus, if you are thinking about a three-day business trip where airfare is $500 and hotels are another $500 but you won’t get any work done other than the business conducting by traveling, you should not consider the cost of the trip $1,000 but instead about $1,600 (if you are at a $50,000 salary). Measuring the cost in this manner makes many business trips counter-productive. Continue reading “Don’t undervalue time”
It all comes down to the eye of the tiger
I was recently speaking with a former colleague who is a leader of one of the most successful businesses I have been part of, a mini-corn (a near unicorn, $500 million – $1 billion valuation), and I realized that there is one overriding driver of large scale success, and it is determination. Anyone who reads my blog (and by definition that means you) realizes I am a huge advocate of analytics based decision making, blue ocean strategy, open management, customer driven products, etc. These are all great and will help you grow and optimize your business but the truly huge companies get there because of the sheer determination and take no prisoner attitude of their leaders.
I was fortunate enough to be part of a team like this and people often ask what was the secret to its success. They often assume it is great technology, design genius or some black box, even internally most of us did not see it (myself included), but the key driver of greatness was the sheer determination of the top leadership. The leadership’s entire focus was on growth, always grow, never stop, never slow down, never let anything or anyone get in the way.
Not a popularity contest
This attitude would often make people uncomfortable but they would never stop pushing. This often meant taking risks that other companies would not take or risks that others in the company did not want to take. It often meant hurting feelings, not just of competitors but those internally who lost resources or prestige to the steamroller.
What stands out is that this leadership team that ended up generating huge success never cared if they were liked internally or externally. All they cared about was getting the most resources and making the decisions that drove their business higher, and only drove their business higher.
It also meant never being satisfied, and this last principle is what helped me see the overall determination. Even when this leadership team had seen more success than anyone else I have ever met, they still have as much hunger as the first day I met them. It is still all about growth, not just winning but owning the space and then it will be about further distancing themselves from number two. It’s probably very much the same as why Bill Belichick does not stop when the Patriots are up by 10 in the fourth quarter, but will still continue passing and competing until they win by 31. Continue reading “It all comes down to the eye of the tiger”