Professors James E. Austin and Herman B. “Dutch” Leonard, of Harvard Business School discuss whether the marriage of a “virtuous mouse” and a “wealthy elephant” work to the benefit of both
What happens when small iconic brands are acquired by large concerns – think Unilever. What happens when giant MNCs acquire relatively small companies that enjoy iconic status as socially progressive brands? Such marriages can be good for business and good for society. Tom’s of Maine acquired by Colgate, Stonyfield Farm Yogurt purchased by Danone, Ben & Jerry’s bought by Unilever, L’Oreal’s deal for The Body Shop, Cadbury Schweppes’ acquisition of Green and Black’s, and Coca Cola purchase of a significant interest in HonestTea are examples of such deals.
Q: According to you, a company that enters an M&A deal is either a “mouse” or an “elephant.” What are the characteristics of the two?
James Austin and Dutch Leonard (JA/DL): Actually, the key descriptor is not simply a difference in size but rather in kind. We are not referring to every small company, but only to those that have become social icons because an integral part of their distinctiveness and success is rooted in the social value that they bring to the marketplace. Hence our nomenclature refers to “virtuous mice.” And there are a lot of large companies attracted to these successful social icons, but not all “wealthy elephants” are capable of entering into a successful marriage with this special breed.
Q: Why is acquisition such an attractive strategy for the “mice”?
JA/DL: Compared to organic, self-funded growth, it can allow much more rapid scale-up – for example, through the ability to reach new markets faster, or through the ability to invest quickly in significantly expanded facilities. Compared to an IPO, it allows the careful delineation of accountability and performance. An IPO puts pressure on the social icon to perform. Through an agreement, a social icon can define with its acquirer terms of accountability for its performance that may be much better suited to what it is trying to accomplish. And, finally, a key virtue of acquisition from the perspective of the mice is that it may, if structured correctly, provide access to managerial systems and capabilities that are needed for going to and operating at scale that would take the social icon years to build. So structured correctly, an acquisition strategy can effectively marry the brand strength and “social technology” know-how of the icon with the access to capital and managerial capabilities of the acquirer. And that is why the search for a partner should be deliberate and careful.
Q: What is attractive about these arrangements from the perspective of the “elephants”?
JA/DL: Most successful large companies excel at business planning, allocation of capital, and execution. Many are also good at product innovation. But few are good at exploring significantly new ideas and radically different business approaches. Empirically, it is hard for these more novel ideas to compete inside large businesses in business planning and investment allocation processes against better defined, more traditional innovations. This implies that, if large companies want to get the benefits of these new products and the potential growth of these markets, acquisition may be the most effective route.
What happens when small iconic brands are acquired by large concerns – think Unilever. What happens when giant MNCs acquire relatively small companies that enjoy iconic status as socially progressive brands? Such marriages can be good for business and good for society. Tom’s of Maine acquired by Colgate, Stonyfield Farm Yogurt purchased by Danone, Ben & Jerry’s bought by Unilever, L’Oreal’s deal for The Body Shop, Cadbury Schweppes’ acquisition of Green and Black’s, and Coca Cola purchase of a significant interest in HonestTea are examples of such deals.
Q: According to you, a company that enters an M&A deal is either a “mouse” or an “elephant.” What are the characteristics of the two?
James Austin and Dutch Leonard (JA/DL): Actually, the key descriptor is not simply a difference in size but rather in kind. We are not referring to every small company, but only to those that have become social icons because an integral part of their distinctiveness and success is rooted in the social value that they bring to the marketplace. Hence our nomenclature refers to “virtuous mice.” And there are a lot of large companies attracted to these successful social icons, but not all “wealthy elephants” are capable of entering into a successful marriage with this special breed.
Q: Why is acquisition such an attractive strategy for the “mice”?
JA/DL: Compared to organic, self-funded growth, it can allow much more rapid scale-up – for example, through the ability to reach new markets faster, or through the ability to invest quickly in significantly expanded facilities. Compared to an IPO, it allows the careful delineation of accountability and performance. An IPO puts pressure on the social icon to perform. Through an agreement, a social icon can define with its acquirer terms of accountability for its performance that may be much better suited to what it is trying to accomplish. And, finally, a key virtue of acquisition from the perspective of the mice is that it may, if structured correctly, provide access to managerial systems and capabilities that are needed for going to and operating at scale that would take the social icon years to build. So structured correctly, an acquisition strategy can effectively marry the brand strength and “social technology” know-how of the icon with the access to capital and managerial capabilities of the acquirer. And that is why the search for a partner should be deliberate and careful.
Q: What is attractive about these arrangements from the perspective of the “elephants”?
JA/DL: Most successful large companies excel at business planning, allocation of capital, and execution. Many are also good at product innovation. But few are good at exploring significantly new ideas and radically different business approaches. Empirically, it is hard for these more novel ideas to compete inside large businesses in business planning and investment allocation processes against better defined, more traditional innovations. This implies that, if large companies want to get the benefits of these new products and the potential growth of these markets, acquisition may be the most effective route.
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