Mergers and acquisitions in the technology segment: a negative impact on innovation? | Ativy
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Mergers and acquisitions in the technology segment: a negative impact on innovation?

Jun 8, 2021 | STRATEGY

We are experiencing a historic moment in the segment of information technology in Brazil and around the world. Over the past years, the dash for digital transformation has enhanced and, with it, the need to innovate has gained emphasis and relevance. Therefore, the companies came across a divided scenario: while many trades seek to reinvent themselves, others establish and foster a predatory culture of mergers and acquisitions.

At first sight, it may seem too hard to speak about the M&A (mergers & acquisitions) strategy in this way, so recurrent — and, in most cases, also relatively efficient — in our segment. However, the truth is tough and should be directly said: in the event the transaction purposes are not clear and well established, sinning to strengthen the complementary strategy, merger or acquisition takes the plunge to become a simple financial trick which slightly aggregates to the future of the operation. And, when it comes to business, that is where lies the danger.

A side effect of a merger or acquisition short in strategy is the strengthening of the competition due to the lack of innovation. Several specialists have studied the subject and studies evidence what we have testified in practice: it is natural that companies focused on M&A reduce their commitment with disruption, dedicating precious time to the execution of financial and operational strategies. In such environment inhospitable to ideas, culture becomes a challenge, and the team motivation, a great obstacle.

The eagerness to keep the sale outcomes and to pursue financial optimization — two expected aspects in this growth process — begins to capture the executives’ attention, positioning innovation on a terrible second place in the company strategy. If not third, fourth or fifth place.

In my point of view, it is too sad to observe, in great part of these operations, the chaotic concern with assessing EBITDA (outcome of the company operation) even before glimpsing the innovation that the incorporated company — molded by stories, people, and products — could bring to the business and to the ecosystem. The lack of purpose is, unfortunately, too common in acquisitions.

Opportunism? Maybe. The truth is, in the business world, on many occasions, money value overcomes the purpose value.

I dare to say that the market moment is, in part, responsible for such thinking. We live at the apex of the accelerated growth of technology companies, which usually means fast growth of customers portfolio and companies limited to innovation. In addition, perspectives of astronomic gains — especially those which are derived from IPO (initial public offering) — may erase the business view to beyond the figures.

In Brazil, the initial public offering stimulated well succeeded movements, such as Totvs, Linx, Neogrid, Méliuz, and others, and allowed other companies to project the possibility to multiply the valuation with focus on IPO, aiming to surf the same wave. Not all of them, however, are concerned about the consolidation of a coherent strategy.

Locaweb, for instance, clearly established a purpose in the national market. Maybe the company leaders have understood that websites and e-mails hosting operation would not lead them to the expected figures and, thus, have decided to revalidate their business model. The company’s acquisition of Tray, in 2012, gave signs of a new direction towards e-commerce.

I would say that the execution excellence, allied to a clear purpose, led to Locaweb spectacular success in B3 over the past years. It is, with no doubt, a lesson companies which defend M&A as part of the strategy, should pay attention to: the purpose was so clear that the movement in the Stock Exchange did not open space to the competition to strengthen an innovation strategy. M&A itself became part of the innovation.

On one side, we have entrepreneurs eagerly committed to seek new solutions, which I defend and admire. On the other side, we find extremely financial companies eager for an opportunity to acquire “ready cash”. Particularly, that is how I call organizations which have the old portfolio of customers, showing small growth at the order of 10 to 30% per year — which, in technology, is too low. In those companies, innovation is not seen as plan A, and the acquisition strategy only reiterates a tactic to speed the portfolio growth.

Once more, the companies which defend such position are busy with keeping the portfolio acquired, gathering processes, unifying systems, optimizing costs, reducing people, and improving EBITDA, and forget to build the future. Moreover, the negative effect is even more devastating when the conduction of the process is made by a company which, historically, favors figures in the detriment of people and innovation.

The outcome? Space is opened to truly innovative companies. Those which grow with the nonconformity culture, ready to pursue and produce the new. Those are companies which understand that they cannot achieve exponential outcomes performing the same recipe always.

If I could synthesize in a single phrase, I would be emphatic recommending that whatever your purpose is, strengthen your strategy and seek an intent. A company which does not have an intent is like a being without soul. It suppresses its essence and, when prioritizing outcomes, slightly contributes to innovation. Who wins in such situation? The competition!