THE STORY
There are lots of stories written and movies made about feuding families in rural areas. A common tactic used to attack the enemy in these stories family was “poisoning the well.” What would happen was that one family would sneak onto the other family’s property. They would then do something to the well water or reservoir of their enemy with the intent of either drying up the source of the water or making it unfit to drink. This was called poisoning the well.
This was a particularly nasty tactic, because if a farmer or rancher doesn’t have access to good water, their livelihoods are ruined. Not only is there nothing for the family to drink, but nothing to feed the cattle or water the crops. The family who was attacked in this way had few options. Often they just had to give up and move somewhere else.
What makes this tactic even scarier today is the fact that it is not that difficult for a terrorist to “poison the well” of major cities. Using modern chemistry, it wouldn’t take much for a terrorist to cause the major sources of water for huge cities to become unfit to drink. Suddenly, that old tactic takes on new significance.
THE ANALOGY
A similar situation occurs in the business world. However, instead of the well or reservoir being filled with water, it is filled with cash. Just as water is needed to keep the cattle healthy and the crops growing, cash is needed to keep the company healthy and growing. Cutting off the flow of water can ruin a farm or ranch. Similarly, cutting off the cash flow to a business can ruin it.
And just as the families in these movies and books had enemies, so do businesses. And if a company makes a strategic error, they can create a situation in which competitive forces “poison the well” of cash for a business. This can be so ruinous to a firm that the company can no longer exist.
Therefore, a key component of strategy needs to be protecting the well of cash so that it does not get poisoned.
THE PRINCIPLE
Today’s principle has to do with where the emphasis should be placed when looking at the strategic aspects of a potential acquisition. I believe that, in general, too much focus is placed on potential synergies from the acquisition (ways to boost cash) and not enough time is spent looking for the potential of the acquisition to poison the well of cash (ways to destroy cash).
As we will soon see, acquisitions can trigger competitive events which may cause a poisoning of the well. Since the purchase price in an acquisition is typically linked to the value of future cash flows, any poisoning of the well seriously diminishes the value of that acquisition (because there will be far less cash after the poisoning). It can cause you to grossly overpay for the acquisition if you do not take this into account during due diligence.
Ways in Which Acquisitions Can Poison the Well
There are many ways in which an acquisition can poison the well. For example, let’s assume you want to acquire one of your suppliers. That supplier may also be supplying your competitors (your enemies). The enemies will not want to do anything to help you, so if you buy that supplier, they may take their business with that supplier elsewhere. In other words, your ownership of that supplier can trigger competitors to take away their business and reduce the supplier’s cash flow. You have poisoned the well.
Let’s say you want to acquire your distributor. Suddenly, many of your enemies who also use that same distributor may no longer want to use them because they do not want to help a distributor owned by their enemy. Again, the cash goes down due to ownership change. You’ve poisoned your well.
Let’s say that you want to acquire a direct competitor. It may be that a lot of the customers using that competitor were doing so specifically because they did not want to give their business to you. Once you buy that competitor, it becomes a part of you. Therefore, the customers who were trying to avoid you will take their business away from the company you want to acquire. The well is poisoned.
I spoke about this concept in more detail in a prior blogs (here and here). You may want to go back and review them.
Synergies Aren’t As Great As One Thinks
Given the high potential for ruinous poisoning, you’d think that more attention would be given to it. Instead, my experience has been that the bulk of the strategic focus in acquisitions is around synergies.
Synergies are good and they should be looked for, but if we focus too long in this area, we may delude ourselves into seeing more synergies than really exist. Lots of studies have looked into why most acquisitions fail. One of the key conclusions which keeps coming up is that acquisitions rarely achieve as many synergies as one thinks prior to the deal. Apparently, much of that time focusing on synergies was focusing on illusions which will not occur. They deceive us into seeing more value than there really is.
Worse yet, all that time spent on the optimism over synergies may keep us from spending enough time on the pessimism of potential well poisoning. Too much optimism combined with not enough pessimism leads to grossly overvalued estimations of cash flow. The result is that companies pay too much for an acquisition and destroy company value.
The Google – Motorola Mobility Deal
The principle of poisoning the well can be seen in the potential acquisition of Motorola Mobility by Google. Does Google have enemies? Yes, indeed. There’s a reason why Microsoft filed a complaint with the European Commission back in April 2011, alleging that Google was engaged in illegal anti-competitive activity. There is a reason why several companies which don’t usually work well together (Apple, Microsoft, Research in Motion and Sony) combined to outbid Google for Nortel’s intellectual property back in July. They don’t like the power of Google and they want to keep Google from getting stronger.
Then comes the announcement that Google wants to acquire Motorola Mobility. As it turns out, not only does this action give Google’s enemies a chance to poison the well, it also gives Google’s “friends” an opportunity to poison the well.
For example, Microsoft is expected to use this event to tell people in the industry that they cannot trust Google and should put more of their priorities into the Microsoft/Nokia system. This can poison two wells. First, it can take sales that would have once gone to Motorola Mobility and shift them to Nokia. Second, it can make a higher percentage of phones carry the Microsoft software instead of Google’s Android system. The Microsoft system will shift more mobile advertising revenue to Microsoft (through Bing and other sources) which could really hurt Google’s cash flow.
Worse yet, this just might be enough of a boost to Microsoft to give them critical mass in the mobile marketplace, something they can build on and grow. Perhaps if Google had not announced this deal, Microsoft would have eventually given up on the mobile software due to insufficient demand. A similar situation could occur with Research in Motion, who might have eventually gone away, but now may have a chance to revive itself through the poisoning of Google’s well.
Even Google’s device partners (“friends”) in the mobile space (Samsung, LG and HTC) may now become less enamored with their partnership with Google. They may begin to think that Motorola Mobility will get preferential treatment over their own devices. As a result, they might hedge their bets by getting closer to Microsoft, shifting share away from Google’s Android.
If less of the really cool devices (from Samsung, LG, and HTC) carry Android, and if Motorola Mobility puts Android on inferior devices, then consumers may revolt and switch away from Android. Again, more poisoning of the well.
And if Android starts losing significant market share from all these poisonings, it may have less influence in getting priority for cool apps from the development community. This could start a downward spiral, as even more customers see a reason to switch to others who have cooler apps sooner.
The point here is that this type of deal can cause all sorts of negative poisoning of the well. I hope Google fully considered these ramifications when contemplating the deal.
SUMMARY
Acquisitions do more than create positive synergies. They can also trigger negative impacts on cash flow (poison the well). Since the true amount of synergies in a deal tend to be less than expected, and the poisoning of the well can be larger than expected, strategic emphasis during acquisition may need to shift from synergy to poisonings.
FINAL THOUGHTS
In the old stories, it was the enemy who poisoned the well. In business, we tend to poison our own well through poor strategic decisions. Shame on us! This is a preventable problem, because it is under our control. Make sure you consider the potential for poisoning the well whenever you contemplate a move which upsets the status quo.
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