Strategy is about return. Strategy is about competition. Strategy is about choices - including choosing what not to do.
The Royal Australian and New Zealand College of Obstetricians and Gynaecologists (RANZCOG) is losing a tomato fight on social media right now, and it’s mesmerising – in a <headdesk> kind of way – to watch.
The Australian newspaper reported this weekend that RANZCOG’S Victorian and Tasmanian branch was planning to hold a debate at its scientific meeting next month on the topic, ““Membership before maternity leave: should every registrar have a Mirena?” (Mirena is a brand of IUD; registrars are doctors training to be specialists.)
The internet was there immediately. On Twitter, the Australian medical bloggers @ketaminh, @dr_ashwitt, @drnikkistamp and @DrEricLevi, whose followers add to almost 20,000, began marvelling collectively. Initially at how anyone could think trainees’ reproductive rights were a suitable topic for a 40-minute debate, but very quickly, and in some amazement, at how RANZCOG was flubbing its own response. I have every sympathy for RANZCOG’s president, Professor Michael Permezel. It can’t be fun when your new year slithers in with a mess you’re not responsible for (RANZCOG won’t have chosen, or vetted, the conference agenda of a regional branch). Professor Permezel described the topic to The Australian newspaper as “in bad taste;” the Australian reports that RANZCOG is, in the President’s view, “the most progressive of the specialisation colleges.” But defending yourself to a reporter isn’t effective if you’re simultaneously being hung out to dry on Twitter. If RANZCOG wants to take control of the message, it needs to turn to the medium where the debate’s taking
How did RANZCOG respond on social media? As Eric Levi points out in a long, thoughtful blog post on the dangers of not being on social media, badly. One of the rules of internet branding is to stake out an online presence to prevent anyone else defining you. But the College’s Facebook page was merged over the weekend with its Wikipedia entry. (Not smart, guys: anyone can edit you.) And the Twitter accounts @RANZCOG and @PermezelMichael were claimed, not by the College or its president, but by satirists seizing the moment. Generously, the @RANZCOG account was then given to the College, but it doesn’t appear to have made much use of it: in the last 20 hours, @RANZCOG has tweeted, rather obliquely, to say that it “supports the reproductive choices of all women, including its trainees.” And it’s tweeted about the importance of vitamins and minerals in pregnancy, and about maternal mental health. The College’s webpage is unchanged.
Honestly, it’s not difficult. Here are five suggestions.
- Go where the story is. (It’s not in The Australian. It’s online.)
- Stay with the story. (I wouldn’t like to spend the first weekend of my New Year dodging grenades, either, but you can’t check out of the narrative by telling The Australian you’ll call the Tasmanians on Monday to find out what’s going on).
- Respond in 140 characters or less. (I hope this means distancing yourself from whoever wrote the conference agenda, but, whatever the message, get it out there. Concisely.)
- Stay on message. (Less about vitamins, post-Caesarean section driving and maternal mental health, at least for now.)
- Engage. One tweet saying, “This sounds extraordinary – I’ll look into it” would go a long way.
As it is, though, the story is evolving, and I think it’s got away from you.
As background: Turing Pharma, the crew that raised the price of the antimalarial pyrimethamine (Daraprim) from $13.50 to $750 earlier this year because, you know, they could, announced that it would cut the new price. Somewhat.
But wait! Turing's had a change of heart. The price is staying exactly where it is. There'll be a cap on what hospitals and patients pay, but the rest will funnel through straight to insurers, so you know who'll pay in the end.
Let's be clear: pharmaceuticals are a good thing. Like many people I know, I'd probably be dead without the pharma industry. I've consulted to the pharmaceutical industry. But people who take an antiparasitic medication six decades old and ratchet the price up by a factor of more than 55 are a pack of arbitrageurs, not a drug company. Turing may have an R&D program, but I suspect most of it goes on developing chutzpah.
An economist would tell you that the market will step in, and, fortunately, that's what's happened: the compounding chemists at specialty pharma company Imprimis have whipped up a me-too that they're selling for 99 cents a capsule. So patients dodged a mosquito this time. But the problem isn't that the market might step in. The problem is that the regulators will step in. Hillary managed to write to the FDA, the FTC, make a campaign video and announce an impending Detailed Plan in less time than it might take you to develop symptoms of toxoplasmosis (which is another thing Turing's drug is used for).
Regulation works when everyone - patients, providers, insurers, drug companies and the whole kit and caboodle - can pursue conflicting and overlapping interests in a way that gives the least worst overall outcome. But, for that to work, regulation has to be considered and judicious. Turing Pharma's behaviour will provoke retaliatory regulation. I don't know who will really lose when the chips are down, and I don't think pharma companies are perfectly regulated as it is. But, by pulling off this outrageous arbitrage, Turing is harming an industry it doesn't even belong to.
Four weeks ago, I listened to a genetics lecturer tell a medical school class that 23andMe, a much-heralded biotech startup established to provide people with an interpretation of their own genetic information, had been largely shut down. “Which is good,” she added with satisfaction, “because people shouldn’t be able to get their genetic information without counselling and support.” But now 23andMe is back – mostly.
23andMe collects raw data through a saliva test kit. The FDA, citing concern about the potential consequences of erroneous test results, ruled two years ago that they couldn’t market that kit as a way to obtain information on genes or traits. Since then, you’ve still been able to access your raw test results as strings of SNPs, but you've had to do any interpreting yourself: the site has mainly offered information about ancestry. Still, 23andMe seems to be doing just fine: a month ago, in October, it raised $US 115 m in Series E financing, and, starting this month, it's making health information available to US customers again.
I'm not denying that the lecturer who advocated counselling before disclosure had a point. I'm a customer of 23andMe, and I remember clicking to see which variant of the APOE gene I had. The E4 allele is associated with a much higher risk of Alzheimer’s, and, though the disease doesn't run in my family, I was mildly curious. I clicked. Are you sure? the website asked me. And my mild curiosity spiked briefly into terror. But I chose to click again. Whatever you would have decided, wouldn't you at least have wanted the choice?
My parents wrote my genetic code, and I'm glad 23andMe is returning so I can read it. I don't think using 23 and me to read what's written by your genes is really any different from using a mirror to see your face. Both experiences can freak you out. Both experiences can send you to the doctor. But, fundamentally, both experiences are about seeing who you are. There was something perverse about taking that away.
Why is drug development in CNS so damnably difficult? This topic exasperates me, and I'm not the only one. Just noticed this article from 2013. To the author's reason's, I'd add: animal models predict results in humans more poorly in CNS than in, say, anti-infectives. And side effects show more scatter as you move through Phases I, II and III and work with ever-larger populations in trials, so your risk loading is much higher as you move towards approval.
I always knew I was a free rider, and, to tell you the truth, I never quite shook the squirm. See, I’ve read Slate all over the place. In the UK. In Switzerland, for years. And in Germany – it was one of the sites I tried to load, I think, when someone I was working with said, bemused, “An aeroplane’s just flown into the World Trade Centre.” I imagined a Cessna, and typed www.nyt.com into the browser bar, to check. And couldn’t raise it. Huh. Or Salon. Or Slate. What’s with that?
Of course, my loyalty doesn’t matter to Slate. The magazine can’t monetise me, for all that I’ve followed it from the beginning. That was in 1996, when it was still part of Microsoft, and still chasing Salon, before its first attempt at charging for content, and before ornery contrarianism replaced The Elements of Style.
But, to be honest? I know what was in it for me. I was improbably addicted to Slate’s Dear Prudence advice column. There was nothing in it for Prudence, though: Slate’s US-based advertisers want US-based customers. All the far-flung among us do is rack up bandwidth, which is undoubtedly why Slate has just introduced a paywall: $US 5 a month.
There are only two reasons to do anything in business, said someone who should know: to increase revenue or to lower costs. So there are either enough of us here in the Slate diaspora to be driving bandwidth costs, or to be worth considering as a subscription revenue pool. Or both – but I hope it isn’t both. Fudged thinking gives a kludged strategy.
I know why I want multinational corporations to set up shop in New Zealand. But what's in it for them? The Economist nails part of it: New Zealand is a first-world country that’s a very long way from anywhere else. The message? Screw up here, and you'll get away with it; succeed here, and you can roll out elsewhere, fast.
It’s not just about products. I've seen quite a bit of business model innovation in New Zealand. Sometimes, it's because they have to scramble like mad to make margin; sometimes, it's because everyone here knows everyone else, and things move so much more quickly. We don't pitch that advantage as often as we should. I'd love to be able to say, "Come here. We’re quick; we’re adaptable. If you're going to do business differently, give it a spin here."
"A strategy that is not implemented is merely a good idea," said Bruce Henderson. Implementation without strategy, though, is like a nightmare you can't wake up from.
Generally speaking, there are only a few ways to make money on the Internet. There are e-commerce companies and marketplaces — think Amazon, eBay and Uber — that profit from transactions occurring on their platforms. Hardware companies, like Apple or Fitbit, profit from gadgets. For everyone else, though, it more or less comes down to advertising.
In the New York Times, Nicholas Carlson looks at What Happened When Marissa Mayer Tried to Be Steve Jobs. His conclusion?
It’s unlikely that her personal turnaround plan included shrinking a $30 billion company into a $5 billion one, all to combine it with a $3 billion company and realize $1 billion in cost-savings. But it’s also unclear what, if any, other options she has.
So, you have to write a feasibility study! Don't panic, and for goodness' sake don't Google it, or you'll end up thinking you need a degree in statistics before you begin. It's as straightforward a task as they come.
I've written a short six-step guide to doing a feasibility study. Download it here! If it's useful, feel free to circulate it.
If I can improve it, please tell me how. If I can get it to a point where it's really helpful, I'll turn it into a proper e-book, and I'll follow it up with another on how to do a business case, which is a feasibility study's older, bigger sister.
"You’re from New Zealand? I’ve been there - it’s so beautiful.” It took me years to hear this as an insult.
Yep, an insult. Let's flip it: “You’re from Germany? I’ve been there - it’s so beautiful. The chalk cliffs of Rügen! The undulating Sauerland! The Mecklenburg Lakes, the...” Stop, already. You sound like you're missing a cog. No one goes to Germany to see lakes or the Sauerland. Ask anyone who's been there what they saw, and they'll mention a string of attractions: Marburg’s cobbled streets, Bavarian castles, and the way Heidelberg nestles around the river Neckar. The half-timbered houses that sweep north, changing in pattern from village to village; the Rococo acid trip offered by the Wies church near Steingarden; Berlin’s Museum Island, and, of course, the Oktoberfest.
What do all these things have in common? They were created - none of them would exist without human intervention. But, in the Rough Guide’s top-ten collection of things to see here, the only entries created by human hand are the Taieri Gorge Railway and the Otago Rail Trail - both of which are beaten out, in the ranking, by tree ferns.
Attractions aside, what is Germany known for? (Don't mention the....) The Germans are niche specialists: manufacturers, not just of machines, but of the machines that make other machines. We know them for high technology: semiconductors, precision engineering, and cars; before that, chemicals. (Those three groups make up 42% of Germany’s exports by value; primary products, listed by the Federal Statistics Office, fall under “other”.) These are high-knowledge industries, and high margin. Whereas seven out of every ten of our export dollars come from primary products, in Germany, that figure flips: fewer than one out of every ten euros earned from exports comes from primary products.
But the 100% Pure rep pushes tourism and our primary food exports more than anything else, and that’s a problem: as the Productivity Commission has said, tourism has low productivity, meaning that we use a lot of time and effort, and don’t get a lot back for it, and the same goes for agriculture and fisheries. However, both industries absorb a lot of people - about 190K of us for agriculture, forestry and fishing (.xls), according to Stats NZ, and another 170 K in tourism. That's about one in six of us working in a minimally productive field.
On the other hand, electricity and gas are very productive, as is mining, which contributes sixteen times as much per hour paid to GDP as accommodation and retail, one of the pillars on which tourism rests. Less controversial industries are productive too: media, telecommunications and financial services also have above-average productivity. It's probably not a coincidence that those are IT-heavy industries: if you live on the edge of the world, IT is one thing that helps make distance vanish.
So do we really want to identify, to ourselves and to the world, as 100% pure? Or should we admit that there may be even more value in what we create than in what we show our tourists, or what we reap and ship abroad? If we could adulterate that purity a little, mixing in a little application and ingenuity, we'd have a really intoxicating - a really productive - combination. Let's be a bastard blend. Purity will only get in our way.
New Zealand’s cities have a hard row to hoe. Most of their revenue comes from rates, a tax on land, and unlike, say, the Swiss cantons, there are very few financial levers that Dunedin can deploy to persuade business to create jobs there rather than in Christchurch, 360-odd kilometres up the road.
If you can’t compete on revenue, you have to compete on everything else. So you’d think that New Zealand’s cities would be bending themselves into pretzels to distinguish themselves from each other. Is that the case? I looked at the vision each of our main centres has given itself.
Dunedin’s vision is fairly clear. It wants (unsurprisingly, given its current makeup) to be a knowledge centre, and it also wants to be a business mecca, probably for the creative industries. You can see what it might try to attract, and, crucially, what it might say no to.
But looking at the rest, are you much the wiser?
Wellington could absolutely, positively distinguish itself, though it doesn't. Staying with our Swiss example, you can easily build a brand around being an arts and culture capital (think Wellington to Switzerland’s Basle), just as you can around being a commercial centre (think Auckland to Switzerland’s Zurich).
Auckland wants to become what the Germans call an eierlegende Wollmilchsau - an egg-laying woolly milk-pig, a beast that is everything to everyone, and so risks becoming nothing special to anyone. Competitively, the message to business is, We do everything: don’t bother looking anywhere else. And that’s fine, as long as no one does look further - but it doesn’t say much about what Auckland’s especially good at if they do.
Christchurch’s vision is universally applicable for the opposite reason: it’s so anodyne that it could apply to every decade from the 1850s - and perhaps especially the 1850s - on. Ironically, its message (“we’re safe and predictable”) runs counter to the one thing that’s recently put Christchurch on the map: the series of earthquakes that created opportunity through crisis.
Do our cities really understand that they need to compete with each other? .
A few weeks ago, I argued here that mergers were immoral: so few of them create value, and it’s so hard to predict which ones will, that I don’t think you can justify the risk they pose to shareholder value, or, more importantly, the anguish they put employees through.
Now, though, Myoung Cha and Theresa Lorriman have published an article in the McKinsey Quarterly that looks at the notoriously merger-happy pharma industry, arguing that there, at least, “megamergers have created significant value for shareholders.”
Let’s unpick that. The authors write that the median excess return was 5% above the pharma industry index. (In other industries, they helpfully add, megamergers create negligible value at best.) Since their pharma figure is a median number, it means that half the deals created less than 5% in excess value.
The authors don’t say how many created no value, or destroyed value, though they do say that ‘consolidation deals’ have positive total shareholder return (TSR) at the three-year mark, but that TSR turns negative after five years. In a consolidation deal, two companies overlap considerably (for example, each may have a neuropathic pain research programme at opposite ends of the country), and one swallows another. The acquirer then does one of several things to increase profit, most of which involve firing people: “accelerating revenue, improving the cost of goods sold, reducing overhead, promoting R&D rationalisation and consolidation, or improving working capital.” By contrast, a growth-oriented merger is one where a new company is created, or new markets are explored.
Where does that leave us? I’d argued that the unpredictability of mergers, and the pain they cause, meant you couldn’t justify the bet.
McKinsey tells us that half of all pharma mergers do create at least 5% excess value for shareholders, but that the proportion of those that are consolidation deals (and McKinsey doesn’t tell us what proportion that was) have negative TSR in 5 years. In my book, those are still unconscionable: no one profits, and the acquired company is plucked to the bones (McKinsey says an acquired company contributes just 10% of new-product revenue at the five-year mark, versus 24% for the minority company in a growth merger).
What if you’re planning a growth merger? You still face a conundrum, and McKinsey hasn’t given us enough data to tell us how well the dice are loaded. You have an x% chance - let’s call it a 50% chance - of generating an additional 5% in TSR, relative to your industry’s index. Is half a shot at shareholder payback worth the human cost to staff? That’s something CEOs - and shareholders - need to decide for themselves.
Disclosure: I worked on several pharma cases (though none related to mergers) as a consultant at The Boston Consulting Group (BCG). BCG is McKinsey's principal competitor.
This month, PHARMAC, New Zealand's medicine's funding agency, released a discussion document as part of a review of its decision criteria. In the document, you'll find something purporting to be a proposed decision-making matrix:
Got that? Didn't think so. With the best will in the world, this isn't a matrix. A decision matrix gives you a value for the intersection of two criteria, and - crucially - it generally helps you make a decision. This doesn't do either of those things, though it does line the relevant factors up in a rectangle.
Let's remix the matrix
If we look at the diagram, we really see that Pharmac is showing us two sorts of criteria. One is how well a proposed treatment meets patient need. The other is cost. And each of these can be high - a good match to patient need, and a high cost - or low.
Now, we can sort the factors on the original diagram into our cost/benefit matrix:
This gives us a good idea of how PHARMAC might frame its decision-making for any given case:
You could go a step further, weighting the factors and grading each funding proposal against them. That would probably introduce pseudoaccuracy into a process that's intended to have a little wiggle room. But remixing the matrix this way frames the beginning of your deliberations: it gives you a place to start. You can then go through the various factors in detail, determine the ultimate point on the matrix - and reach your final funding decision.
It shouldn’t surprise us that everyone involved in healthcare – the Medical Council, Medsafe, Pharmac, the DHBs, pharma companies (and of course the poor old patients themselves) says they want the same thing: better outcomes for patients. Or should it?
Let’s think about the goals that some of these players have: Pharmac is one of the health system’s main cost-control points. Medsafe focuses on safety and efficacy. Patients really do want better health outcomes, while pharma companies – well! We’ll get to them. Though these goals may overlap, they’re not identical, and they don’t line up neatly to show an overarching, uniform interest in better patient outcomes.
We should be open about these interests, and we should recognise that they complement each other. Overall, New Zealand needs a system in which the pursuit of many complementary self-interests gives the best overall outcome possible. We don’t achieve that by persuading players to modify their own self-interest, but by regulating the framework within which each self-interest is pursued.
What does this mean in practice? Think of pharmaceutical companies, for example: notoriously, they pursue profit. But they are market creatures in a market economy, and to criticise them for seeking shareholder returns is like criticising a jaguar for being a carnivore: in the ecosystem in which they live, they cannot be other than they are.
The implication? If you want pharma companies to lower medication prices, the answer is not to appeal to them to be less rapacious, or more compassionate. The answer is to modify the framework within which they pursue their goal – by introducing fixed-reference pricing, or (as Pharmac has done so successfully that it has driven most of the larger companies offshore) by bundling an entire country’s purchasing power, and using that as a bargaining lever).
Claiming that everyone’s overarching goal is better outcomes for patients is woolly-headed. It leads to ineffectual exhortations, to misdirected energy, and to an inability to see, clear-eyed, where the true levers for change really are.
The Greens want to ban it. Labour tried to. And it's illegal everywhere in the developed world, except the United States. Yet DTCA - the direct-to-consumer advertising of pharmaceutical drugs - is, I argued in a paper (5 MB, pdf) presented at the NZ Bioethics Conference on Friday, here to stay.
The debate over DTCA has sputtered away for more than a decade: since 2000, JAMA and the Lancet's journals have published about one article a year on the topic, and the New Zealand Medical Journal is at the lower end of that range. The argument usually seesaws in a yes-but pattern - this aspect is bad! - Yes, but aspect this is good!.
In fact, though, none of the three main arguments against DTCA really hold water. It's a waste of time to refute them.
DTCA raises costs for Pharmac? Not that anyone's ever shown . The theory is this: if you raise disease awareness through DTCA, you'll get a flow-on effect as more people present to their doctor, more diagnoses are made, and, in the end, more prescriptions are written. And you could prove that - if you were a pharma company: to carry out the factor analysis necessary to disaggregate the effect of drug reps, journal ads, samples and DTCA, you'd need to know how much was invested in each, and where. Pharma companies do have that data, but you don't. (Then why do they bother advertising? Because, once one of them starts, everyone else has to pile on in if they want to maintain market share. But a fight for share isn't a fight to grow the market.) In fact, the weak effect of advertising to many people - who may not see an ad, and who may not decide to act on it - has anything like the power of a rep visiting a doctor. Restrict that - as Switzerland did - and pharma companies would really be in trouble.
TCA hurts people because it leads to unnecessary, harmful prescribing? Good luck with that one before the Health Practitioners' Disciplinary tribunal. It's hard to resist repeated requests, and people may be more likely to stick to a medication regimen if they've had a hand in choosing the brand. But arguing that a request leads to prescription and must therefore be pre-empted by legislation ignores the gatekeeper role of GPs, and is an abdication of professional responsibility. Remember, people make specific requests all the time - for benzodiazepines, for example. For opiates. For methylphenidate. Part of the GP’s job is not to give it to them. The FDA - no slouch when it comes to imposing restrictions - concluded many years ago that, despite "years of print DTC advertising, no rigorous evidence has been presented to demonstrate that DTC advertising has had any of the hypothesised ill effects"
... and so we should amend the constitution to ban it. Except that we probably can’t. S. 14 of the NZ Bill of Rights Act 1990 protects freedom of expression, and s.29 applies it to corporations. True, you can restrict it, but only as far as you can reasonably justify "in a free and democratic society.” And DTCA is already regulated - by the Medicines Act (which tells you what you have to include in your ads), by the Medicines Regulations (which tells you what you must leave out) and by the Advertising Standards Authority’s Therapeutic Products Code (which elaborates further). In light of the existing regulation, it’s difficult to see that abrogating a constitutional right because of potential but unproven harm, or because patients make GPs’ jobs harder by making a nuisance of themselves with product requests, is really going to fly.
Why track your non-billable time?
If you provide professional services, you’ll probably have a revenue target to hit at the end of the year using your billable time. So much for this year’s revenue. But today’s non-billable time is tomorrow’s future revenue, and it’s the source, not just of more work, but of better work than the stuff you currently do. There are three reasons to track how you spend it: (1) so you’re putting it in the right places, (2) so you can free up time by finding activities to dump or delegate, and (3) so you know when you’ve done enough. And it's easy to do. From the plethora of free, cross-platform services available, I picked Toggl, which is quick, gorgeous and has great reports.
1. Spend time on the right things
Former Harvard Business School Professor David Maister, certainly the world's expert on professional services, points out in one of his excellent podcasts that, if you’re trying to increase revenue, there are four things you can spend time on: growing relationships with existing clients, spending time on prospects, catering to someone who is aware of a need, and, finally, catering to someone who is not aware of a need. (This last, he says, is “the act of a desperate man or a desperate woman who doesn’t get how the world works.")
What’s odd is this: professionals almost always agree that growing relationships with existing clients is the easiest way to win business - and not just more business, but better business. Yet, when you ask them how they spend their marketing time, you'll find that most of it is directed at future clients - or, rather, potential future clients. This means brochures directed at non-specific targets, a website put up “because everyone has one,” and awkward networking events no one really enjoys, yet feels obliged to attend.
If you know how much of your non-billable time goes where, you’ll be able to sit down at the end of the year and ask yourself two things: first, was the amount and quality of business I won from each type of activity proportional to the time (and stress) I put in? And, secondly: if I’d entirely done away with the low-yield stuff, and put the time into growing existing client relationships or playing with my kids, would I be better off?
2. Find activities to dump or delegate
I belong to a business peer supervision group that recommended, a year ago, that I keep a detailed calendar of a single week. The results staggered me: the minutes spent here and there changing flights and bookings, rescheduling meetings and batting away minutiae didn’t just add up, they cast a long shadow over my week. Once you work out where your non-billable time goes, you can go through your log ruthlessly and ask whether anyone else could have done any of it - an assistant, virtual or not - or whether it would have mattered if you’d dumped it entirely.
3. Know when you’ve done enough
When you plan your year (and you do plan your year, right?), you’ll have a revenue target in mind, and you’ll have an idea of what you need to do to sustain your business and to improve it for the following year. You might be wrong about it, but you’ll have an idea, and one of the reasons to formalise and track it is so that you can calibrate your expectations, and direct your efforts where they have most impact. But you need to know, too, when you’ve done enough: budget out your non-billable time at the beginning of the year, and then, when you’ve met budget, stop. One of the nicest surprises about tracking your non-billable time is that, because you know how much you’ve done, that uneasy feeling of never having done enough evaporates, and you have more time for sunshine.
M&A activity in Asia-Pacific is down more than 25% from its 2007 peak, but eventually, inexorably, it will begin to rise. It’s an odd activity: planned by the numbers people, mergers invariably run aground on what’s derisively called the soft stuff. Here's a note on the wreckage.
Ostensibly, you merge to create value: either you cut costs by eliminating duplicate operations, or, more rarely, you plan to increase sales by unlocking value in markets neither company alone could access.
But do mergers create value? Since academics began crunching the numbers in the mid-1980s, the answer has always come in various flavours of no. For example, there’s evidence that acquirers, at least in cash-only mergers, bid about 15% over the going price. And they purchase a poisoned chalice: over three years, their stocks lag the stocks of the first loser (that is, the stock of the company that was second in a bidding war) by 50% (yes, 50%). You’ll find various figures if you want to disaggregate this - one HBR Ideacast says 70%-90% of mergers “fail”, and an often-cited report by KPMG at the turn of the millennium found that just 17%, or one in six, actually created value, while 30% made no difference, and up to 53% destroyed value. (Not that this was always evident to the company: as KPMG reported, four out of five directors believed that the deals were a success.)
At this point, we could ask why anyone bothers. That would lead us to courtiers and kings - to the I-bankers and consultants who produce the numbers, and to the CEOs looking for return on ego. But I’d rather flip the question. Who suffers when mergers fail?
Obviously, shareholders do. But they’re not the only ones. Mergers hit employees, and hard: they create uncertainty about job security, which ripples out across workers’ families, and often isn’t resolved for months. As the org chart is redrawn, the deck is also reshuffled for power relationships, which is often more harrowing than the simple threat of the axe. And mergers ride roughshod over tradition, chucking out “our way” for “their way,” or - if the thing is done well - at best for “the new way.”
It’s odd that the human cost of M&A has received so little attention. Though a French psychiatry journal reviewed reactive “psychoneurotic states… subsequent to business mergers” as long ago as 1967, the pickings are sparse over the next four and a half decades, and what little you’ll find in the scientific literature is mostly anecdotal. (That said, psychiatrist Arthur Lazarus’ tragicomic account of being merged and acquired six times during the 1990s is worth reading.) Most recently, researchers found in 2012 that employees’ risk of generalised anxiety disorder almost tripled (from a baseline of 2.4%) in the year following a merger.
When a board approves the CEO’s plan to merge or acquire, it rubber-stamps a lottery ticket bought with someone else’s money. That violates the reason we have directors at all. But it also breaches a duty of care: it’s foreseeable - not just reasonably foreseeable, but eminently foreseeable - that a great many people will be hurt. Until we figure out a way of predicting whether a merger will really work, we should leave well enough alone. As things stand, mergers are immoral
Last week, I looked at Callaghan Innovation’s boldest goal: to boost private-sector investment in R&D by 75% by 2016. This week, I want to focus on a specific innovation that Callaghan plans to use in getting there: the Repayable Grants and Incubator Support Programme signed off as part of Callaghan's business case by Cabinet. It offers tech firms two-year grants of a maximum of $450K, and Callaghan aims to make 24 or fewer grants each year. Notably, you have to put up a third of the funding yourself (or source it elsewhere), which is a substantial constraint for a startup, even one that’s incubated.
It’s true that it’s hard for startups to cross New Zealand’s capital gulch: you can be small enough to subsist on the smell of an oily rag, or you can be stable enough to attract investment, but it’s very hard to grow from one category into the other. (Lance Wiggs graphs the dilemma nicely here, and you’ll see that Callaghan is rushing in where so far only angels are treading. There’s a real need here.) So how does Callaghan plan to let a thousand - OK, 24 - flowers bloom?
With help from two to four privately-led technology incubators. Last week Callaghan requested expressions of interest (rego required) from anyone interested in forming a technology-based incubator - that is, a privately-owned early-stage investment vehicle that channels seed capital to new ventures emerging primarily “from universities and CRIs”. You pitch to an incubator with your technology; it assembles the right team, if you don’t have one in place.
I see why this is attractive from a scientist’s point of view: you get management skills, which is the thing you most lack, and you get a footbridge over the funding gap, as the incubator channels the seed capital it somehow has access to towards you.
But I can’t see what’s in it for the investor. True, the government is giving you what’s essentially an interest-free loan, at least once you factor in the time it will take you to become profitable and discount the value of repayments (capped at 3% of revenues) back. But what do you get for that? You get a constrained ability to sell offshore (Callaghan’s EoI document requests input on how to structure clawbacks in the case of offshore sale). That’s a problem, because if your exit route is to become an acquisition target (which your private funders, who will have a 3 to 5 year exit horizon, are likely to want), you won’t find many buyers in NZ, and you won’t find many elsewhere who will want a company in which the NZ government retains, or will claw back - its initial stake (as Appendix B to the EoI seems to have it, though the Cabinet paper notes - optimistically - that funding will reduce to 25% to 35% over three to five years as the incubators earn income).
What’s more, your profit margin is likely to be small. If one or two in twenty startups hits it out of the ballpark (as VCs commonly assume), then you’re likely to hit it out of the ballpark once, perhaps, for each of the 24 startups you invest in annually. But the Cabinet paper foresees that you take 30%-50% of equity at the start (that’s before dilution: the remainder goes to the entrepreneurs) From the rest, you need to repay your investors - you’re a channel, not a source, of funding, and pay your staff - remember, your role is to build and staff a firm around someone else’s idea and apply to Callaghan on their behalf for funding. (You can invoice the entrepreneur for that, to a capped level, but you can’t pay your own salary out of the grant).
As the Cabinet paper notes, “Given time to build up a portfolio of successful exits and returns on equity, effective technology-focused incubators may [may! become self-sufficient.”
You can’t run a technology incubator if you’re a typical, founder-focused angel or VC, used to founding entrepreneurs and their teams who come to you with a concept. If you’re in that line of business, the Cabinet paper explicitly foresees that you found a new venture dedicated to the technology incubator model, where you build a business around someone else’s ideas. In practice, this will mean that the people who really do know most about rapidly building businesses - angels and VCs - will have to decide whether to either switch models, or found a subsidiary with less access to their pool of experience.
In fact, you’ll need to be pretty stellar to get to run one of these incubators at all: one of your crew has to have commercialised new technology before, you need access to private capital (for now) and to angels and VCs (for later), and you need to have the executive-search ability to source a top-notch team. Oh, yes, and you need to have a track record of past successes, plural, in this sort of investment.
From the investor’s point of view, the pitch is essentially this: sign up with us for a free stream of ideas, sourced fresh from a university or CRI. But New Zealand’s problem has never been that it doesn’t have enough ideas, and I can’t think of a venture capitalist I haven’t heard complain about the number of ideas - and teams - pounding the doorknocker. When there’s already a model out there that works, what Callaghan has to explain is this: why would you take on constraints to build businesses for others, when you could strap on your Nikes and just fund them yourself?
In the private sector, you might say to the business unit leader, quietly, and not-quite casually, “Are you quite sure you want to measure your performance by something over which you have no direct control?” In the public sector, you just step back and say, “Wow.”
Callaghan Innovation released its inaugural business case last week. Browsing through it, I was struck by two things. First, only two of its six key performance outcomes has a number attached to it. Secondly, those numbers are stupendous: Callaghan aims to double the revenue of New Zealand’s TIN100 firms, and, quite as ambitiously, it wants to boost New Zealand’s total business expenditure on research and development (BERD) from $1.2 bn (in 2012, when it was 0.58% of GDP) to the equivalent of $2.1 bn (or 1% of GDP) by 2016. That's an additional $864 million in private-sector spending on R&D, or three quarters more than New Zealand’s businesses currently spend. Looked at a different way, it’s equivalent to doubling the research budget of our four largest-researching industries (manufacturing, ICT, primary, construction and transport sectors). And it wants to achieve both targets in three years, by the end of 2016.
I want to focus on Callaghan’s goal of increasing private-sector R&D spending by 75%. It plans to do this partly by offering consulting, or ‘Accelerator’, services through a cadre of client solutions managers, or CSMs, 30 of whom Callaghan plans to have in place by 2016. These people will help companies work out what’s restricting their growth and identify the R&D grants they might be eligible for. Callaghan plans to offer not just platforms for universities and the private sector to collaborate, but also contract research and an innovation precinct on IRL’s old Gracefield site.
But how far will this actually go towards adding $864 m to New Zealand's business expenditure on R&D? Callaghan’s business case says that it will target small and medium enterprises (SMEs) in the high-value manufacturing sector. Okay. In 2010, there were 470,000 SMEs in NZ, about 6% of which, or 28,200, had high sales growth view. About 11% of those were engaged in manufacturing, meaning that the high-growth manufacturing sweet spot Callaghan targets is home to about 3,100 companies.
Yet can we really expect those companies to add the missing $864 m to BERD in order to make Callaghan’s 2016 target? To make it work, Callaghan’s thirty client solutions managers would each need to convince a hundred of these small businesses to add about $279,000 to their existing R&D budget, and even winding that figure back to account for increased R&D expenditure by others in the ecosystem leaves a number too large to be plausible.
By measuring itself on a three-quarters boost in NZ’s private R&D spending by 2016s, Callaghan has adopted a measure it doesn’t control directly. Of course, it can – and plans to – foster and encourage research through the networks and facilitation it will provide. New Zealand certainly needs that. But I’m left with the uneasy feeling that the organisation has appointed itself cheerleader-in-chief without being given everything it needs for the job.
If the Government really wanted to turbocharge the private R&D spending, the most powerful lever available would be restoration of the R&D tax credit, which would bring New Zealand back in line with practice in most of the OECD. Ironically, the abolition of the tax credit year seems to have hit the smaller firms whom Callaghan targets especially hard: R&D by firms with fewer than 50 staff declined by 37% from 2008 (when SMEs invested half of NZ's total BERD) to 2012.
(Some change may be in sight, though it’s not yet here: as PWC reports, the 2013 Budget proposed allowing businesses with an R&D spend equal to at least a fifth of what they pay in wages and salaries to cash up their R&D spend in some circumstances. It’s not a full restoration of the tax credit, but it does bode well for growth.)
Is Callaghan’s only quantitative KPI achievable? Are NZ’s businesses likely to boost their R&D spending by three quarters over the next three years? I hope so, of course, and I think Callaghan is right to emphasise its role as facilitator, networker, and a growth consultant - roles central to the dense weave that needs to underpin the fabric of our startup sector. But adding $864 m to BERD? I don’t see where the money will come from, or why. Just encouraging is not enough: we need to bring back the R&D tax credit, and then watch Callaghan’s targets respond to incentives.
There are plenty of reasons to discourage people from investing in residential rental property: as Sorted says, it’s a lot of work, and it’s illiquid. But, as Stats NZ says, 29% of us rent, and New Zealanders are mighty keen on putting their money into rentals: in 2006, three quarters of New Zealand’s rental households rented privately. If you want to get in on the act, Whitcoulls and PaperPlus have bookshelves stuffed with how-to guides. But you shouldn't: investing in residential rental property isn't just unproductive, it's positively unpatriotic.
1. Investing in rentals drives up the cost of accommodation - for everyone
Though directed at tenants, the Accommodation Supplement, introduced by Jim Bolger’s National government in 1991, has been an enticing subsidy for landlords. The more would-be landlords want to enter the residential rental market, the more the demand for houses increases. And what increases when demand goes up and supply stays roughly stable? Price. Price increases in the residential market hit everyone: those of us who buy (because there’s greater competition overall to buy) and those of us who rent (because those costs have to be recouped somehow).
2. It’s a pyramid game, with a bubble prone to bursting
If you’re thinking of investing in rental property, capital gains are an integral part of the value proposition. But your capital gains rest on two assumptions, both of which are vulnerable: that demand for housing will continue to increase, and that supply will remain constrained. Your assumption that demand will increase rests on a single proposition: that national and international migration will continue, with more and more people fuelling demand, especially in and around Auckland. Supply, on the other hand, is vulnerable to two threats. First, the zoning laws might change to enable more houses to be built on existing land (as infill, or by extending urban limits). That’s just one of a parcel of measures the New Zealand Institute has been advocating. The moment additional housing is possible the value of an urban section falls, and, with it, your capital gain. Equally, supply would be increased if we hit an economic rough patch and New Zealanders began to default on their mortgages (s-u-b-p-r-i-m-e-?), flooding the market with unproductive properties and lowering the cost of houses and land.
3. It’s money under the mattress when you could be helping out
This is the worst of it: if you own a private rental, you’re not contributing to the economy - except incidentally, through tax on your rental income and the odd tradesperson’s fee. In effect, you’re taking a chunk of productive change out of the economy and parking it in the hope of a capital gain. Worse, though, your investment in rental property has an opportunity cost: you could be investing it in business, which would grow the economy.
Are there better places to put your money? Definitely. Stay liquid. By shares, or index funds, or anything that contributes to the economy. But don’t put your money on Free Parking. You may not go directly to jail, but, in the end, none of us will collect any more than $200.