Berkshire's Intelligent Acquisitions
Just going through the book “The Innovator’s Dilemma” by Clayton Christensen. I have a few posts I'll likely write that relate to the book — this is one of them.
“The Innovator’s Dilemma” talks a lot about a company’s culture, and why incumbent leaders of a certain technology are restrained from participating in a disruptive technology's upside. Christensen names these attributes as the incumbent's downfall: (1) Current customers aren't served by new market; (2) New market is too small for large companies; (3) Use of new technology isn't fully known yet; (4) Processes that help them with current business hurt them with new business; and (5) New technology isn't good enough yet to meet higher-end market demand.
One solution to the above issues is to acquire another company that can take advantage of the disruptive technology. If done correctly, this can solve numbers 1, 2, 4, and 5 above.
Christensen breaks down the factors that affect what a company can and cannot do into Resources, Processes, and Values. Resources are people, equipment, brands, technology, customers, etc. Processes are how companies transform those resources into products or services of greater value. Values are standards by which employees make and prioritize decisions (think of a company's "Core Values" of the Jim Collins variety).
So when strategically acquiring a company, you're either acquiring it for its resources, or its processes and values.
Processes and Values are extremely difficult to change once they've been ingrained in a company's culture. So if they are the drivers behind the success of an acquisition (i.e. if the target's culture is very important), the acquirer should never try to integrate themselves with the new company. No synergies here. Integration will destroy the desired processes and values, so the acquired company should be left alone.
But if a company's resources are the primary target, then integration makes complete sense. This is where the elusive synergies can be found. Employees can be moved, technology can be exploited, brands can have new distribution, and customers can be transferred.
Christensen sites the example of Daimler's acquisition of Chrysler. Chrysler's success was rooted in its creative product design processes. Sure, it also had some great resources. But when Daimler integrated the two companies, performance immediately was impacted, and the acquisition turned out to be a disaster.
It's obvious which type of acquisitions get screwed up the most. "Often, it seems," says Clayton Christensen, "financial analysts have a better intuition for the value of resources than for processes."
The Acquisitions of Berkshire Hathaway
Most of Buffett's acquisition candidates are financial and not strategic. But they can still be looked at using the above framework. A majority of Berkshire's subsidiaries are great companies because of their culture: they may have good brands and good people, but it is their culture that ultimately drives their success in the long run. And Buffett leaves them alone.
However, Berkshire does make some "resource" based acquisitions. Below is a list of some recent acquisitions and their categorizations:
Culture: Burlington Northern, Iscar, Business Wire, Marmon
Resources: Russell Corp. (to Fruit of the Loom), PacifiCorp (to MidAmerican), Railsplitter Holdings (to GenRe), Burlington Northern (to ??)
Yes, I included BNI in both categories. Burlington was acquired for both, although currently (and in the near future) it will probably be left alone in favor of their successful processes. But their resources may have further potential value in the future.