Kiwi dam busters, hostile takeovers, share buy backs and innovation

co-authored with Dr Chris Donegan

In May last year, veteran corporate raider/activist Carl Icahn lobbied Apple to increase the size of its share buy-back programme. 

Icahn believed that this action would elevate the stock price, driving Apple to a trillion-dollar valuation. Over the past decade belief in the power of the buy-back has driven many companies to do the same thing. 

Notwithstanding ample evidence that it in fact harms long-term innovative capacity and growth, this type of corporate action is considered high strategy in the C-suites of many multinationals today.

Such strategies often hide a painful reality: many senior management team and boards lack an understanding of what really happens in the workshop/trading floor/ laboratory/programming hub and still further struggle to link the innovative outputs of this activity into broader corporate strategy to unlock long-term value.

Innovation is, unfortunately, often an orphan. 

It may at first seem unrelated, but Les Munro, the last surviving pilot from the legendary Dambuster squadron, died recently at the age of 96.

Mr Munro was a generation older than Icahn and a Kiwi, but the two men shared something in common. The wartime exploits of Mr Munro and his men were enabled by an extraordinary period of innovation during the World War II. Icahn’s career in turn was powered by a burst of unprecedented financial innovation in the 1970s (such as the creation of junk bonds) that both revolutionised and was driven by mergers and acquisitions.

It turns out that hostile takeovers and war have a lot in common.

When billions of dollars (or millions of lives) are at stake and a key innovation increases the outcome of winning, then senior management sit up and take notice. In World War II British Prime Minister Winston Churchill was directly involved in wartime R&D. A close friend of HG Wells, he has been personally credited with numerous innovations, including most famously the tank.

This link between war and innovation can be traced back (and beyond) to the Ancient Greeks and Archimedes’s inventions in defence of Syracuse against Rome. Giant claws, catapults and a superheated “death ray” that set galleys ablaze by harnessing the power of the sun all sprang from Archimedes' mind, catalysed by the threat of imminent death.

Likewise, the boards of Trans World Airlines, US Steel and RJR Nabisco certainly paid attention when Icahn came calling.

In times of national (or corporate) peace, however the urgency to adopt innovation tends to disappear. Leaders become complacent and lose appetite for introducing new weapons (business models, products or services) – they are after all risky.

You would think that corporate R&D budgets would be trimmed. But, for once, cash is not the issue. The total amount of money spent annually on R&D is astronomical, reaching more than $1.5 trillion in 2014. Is this a case of corporate virtue signalling?

But ironically, while the amount of money categorised as R&D spending has increased, the productivity of this invested capital has decreased. 

Steve Jobs nailed the problem in a 1998 interview with Fortune magazine: “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it."

In short what you do with your R&D, how much a company and its culture “gets” innovation – determines if the intangible assets (ideas, designs, data, content, brands, inventions) that R&D generates are ultimately translated into corporate value.

We see this every day; most companies have plenty of innovation but they struggle to identify it, let alone convert it into positive outcomes. In this context, the key questions senior managers and directors need to ask include: 

• What is it that makes us unique? 
• How do we define and codify it? 
• How do we protect it?
• How do we manage it? 
• How do we communicate this value creation to a wider audience (including investors)?
• What is the future and how do we win it?

It’s likely Mr Munro had little grasp of the physics behind the bouncing bomb, but urgency of the mission and the clarity of purpose galvanised everyone involved not just to innovate but to convert that innovation into an incredible outcome.

Icahn’s approach to investing followed a similar arc: identify the target, formulate a clear strategy and remorselessly focus on execution.

The CEOs of those Fortune 500 companies buying back stock are reacting to external events in predominantly tactical ways. But, what if they stood back and asked these questions publicly and privately, every day, driving these questions to the heart of their organisations? 

This is what drives fundamental short and long-term value, based on intangible assets most organisations create everyday but frequently fail to harness. That would win wars and be truly innovative. 

Paul Adams is CEO of EverEdge IP.

Dr Chris Donegan is chief executive of EverEdgeIP UK.

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