Case Study – #006 R&D Acquisitions

Problem Statement:  Our company has a policy that we cannot consummate an external acquisition until our internal researchers give the go-ahead. They must replicate key studies for the acquisition candidate and only then can we begin our negotiations for acquisition. Our internal scientists have been rejecting 80% of all our acquisition candidates. This is after we have already performed our rather extensive due diligence (as members of the acquisition department). Are 80% of the external companies just trying to blow smoke in our eyes? Or is it our internal scientists?

Discussion:  It's highly unlikely that 80% of external acquisition candidates are frauds. There is an element of Adverse Selection+ in every acquisition: you can only buy from those that are willing to sell. The percentage of undesirable acquisitions is probably higher than you would find in most other markets. Still, 80% is too large a number, so there must be something going on as part of the due diligence by our internal researchers. It could be a matter of Not Invented Here+ NIH. We also must overcome the challenges of falsification bias+. It could be a matter of poor documentation of test procedures by researchers in the acquiring company. The 80% almost assuredly involves the difficulty of sharing the implicit or tacit knowledge+ of the originating researchers.

You mentioned internal researchers must replicate key studies. What is a key study anyway? We should be acquiring a technology with broad applicability. We should be looking for technologies that can spawn multiple blockbuster+ products. How can a handful of studies make or break our evaluation of a technology in 80% of our candidates? How can we expect anyone to parachute in at the tail end of years of study and to get up-to-speed during a month or less of due diligence? We're acquiring a research team and not just a handful of studies. A successful venture brings a mixture of technology, team and research environment (i.e.., being able to take a lemon and turn it into lemonade).

The above discussion should give the thoughtful analyst more than enough material to sit back and rethink the acquisition process. How do we design transactions to avoid NIH? How do we minimize the impact of Adverse Selection? This is a prime area for application of World Class R&D thinking.

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Case Study - Listing (Proposed)


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