Avoid the Value Destroying Arms Race

This blog was coauthored with Leif Maiorini, a tremendous leader within my team at Cushman & Wakefield. These are our views and not necessarily those of the company. 

Your “citizens” do not need another arms race

You’re probably familiar with terms like “arms race” and “mutually assured destruction.” This refers to the Cold War period (1947 – 1991) between the U.S. and then-Soviet Union, who stockpiled nuclear arsenals to keep each other at bay. Now, it is true that none were ever deployed. Thus, we have two countries with lots of dead/decaying warheads, which is a costly mess to unwind economically and ecologically.

The net result is a great deal of value destruction (trillions of dollars). Driven by differences in social, economic and political points of view, their mutual desire to suppress the expansion of the other’s ideology is likely one of the greatest wastes of economic, political and social capital ever enacted.

The result was driven by fear, fear that the other would have a strategic advantage or a capability that would be used to tip the scale, changing the balance of power and resulting in global expansion of their opponent’s interests. The panic that one party would have an advantage over the other led to a considerable amount of irrational investment that would only be apparent in hindsight, long after the capital was spent, the leaders gone, and the stakeholder value destroyed.

You’ll hear the same term — “arms race” — applied to corporate America a lot right now. Nuclear war is far more serious than a concept like acqui-hiring, yes. But the arms race in corporate America, mostly seen through M&A, has the same root: irrational fear that the competition is getting ahead and need to take bold action to ensure that they have a defensive position. Far too often, ego-driven, growth-seeking leaders allow their personality get in the way of strong decision-making and experience (which presumably got them to that perch).

Many corporations are in their own version of a “cold war.” Afraid that their competitors might have an advantage, they rush into risky investments that usually result in a destruction of value for their stakeholders. Few companies get the synergy promised in their business case when they acquire another entity. More often than not, the acquiring company overpays and the culture clash results in a type of organ rejection that jettisons the best minds from the combined entity leaving the shareholders with a fraction of the anticipated value.

When you make decisions from a place of fear, power and ego, it can cloud your decision-making massively. The decisions that result are sub-optimal at best and essentially destroy companies at worst.

A good example here would be Hewlett Packard. They bought a company called Autonomy for $11.7 billion in 2011; because of accounting issues around that deal, they had to take a $8.8 billion write-down, which knocked out all their profits for an entire quarter. Some people have called HP and Compaq the worst merger in tech history. Meg Whitman has engineered an incredible turnaround there, but the company today is a much smaller version of what it was at peak.

Arms races rarely serve the best interests of “citizens”, in the case of corporations, our clients and customers. Thus, we believe we must seek first to understand unmet client demand and then invest in technologies and solutions that address those needs. We will not make technology investments from a position of fear, ego, or irrational impulse.

  • We continue to find partnering the most advantageous strategy for this rapidly changing space. With hundreds of start-ups entering the commercial real estate ecosystem each year, the ability to pivot and exploit the best solution is greater if you are able to partner. Few solutions offer true, differentiated capabilities and our clients dictate that we leverage and support a wide variety of solutions, often solutions that are seen as competing. This is difficult to do without an open, partnership approach.
  • We are a global real estate services company that leverages technology to increase the value we deliver to our citizenry. Acquiring a technology company does not make us a technology company, nor does it justify trading at multiples of revenue rather than EBITDA; thus it is possible that value is destroyed by most technology acquisitions. We look to strategic partnerships with aggregators like DMGI and Accruent as ways to support continued growth and investment in CRETech.
  • We continue to partner with innovative accelerators like MetaPropNYC, 1871 in Chicago, and Moderne Ventures to identify new players that could help us meet the needs of our clients as we work toward a POC as a Service model across our markets.
  • Our focus is on making our service lines more productive, creating a level of interconnectedness between them and our client, and providing the analytics that enable more effective decision making. Given that for most companies, real estate is their top (or second) largest expense, helping our customers get the greatest value from this investment is our top priority.  .

So here’s the soapbox – Stop the arms race. The arms race described above — the Cold War version — certainly didn’t benefit any citizens. Companies have “citizens” too, those being clients and customers. So before you go out and make an irrational decision, ask a few questions:

  1. What are the unmet client demands?
  2. How should this demand be addressed? What are the solutions that create the greatest value?
  3. Has this problem been solved? Is there something in the market (or a derivative market) that could help solve them?
  4. What is the option that results in the greatest benefit to all parties and the greatest value for our customers?
  5. What is the value of an acquisition, investment, or partnership? Who benefits? Are there competing solutions and will our strategy result in a transient, strategic, or little/no advantage for our stakeholders?
  6. Would we be positioned to buy this market player? Is that the right decision?
  7. What would that look like financially and culturally?
  8. Are we buying this tech just to buy it, or is this serving a need and researched?

We believe that answering these questions, playing out the scenarios, and looking at the outcome with a high level of scrutiny will result in less acquisition activity, greater partnerships, and higher overall value for all involved.

Adam Stanley - Connections blog - Thinking like a disruptor

Adam L. Stanley Connections Blog

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