G.E., Viacom, and the DreamWorks Deal
The Wall Street Journal did a front-page piece recently (December 12) on Viacom snatching DreamWorks from G.E., its expected acquirer. The article contrasted G.E’s methodical analytics-driven approach to M&A negotiations with Viacom’s Hollywood-style go-with-your-gut deal making, the implication being that G.E. lacked the decision-making style necessary to compete effectively in a new media economy.
The story highlights the differences between three business cultures that, respectively, celebrate invention, deployment, and optimization. These are the three disciplines that must be coordinated in order to perpetually refresh an enterprise. They are the key, that is, to what we are calling dealing with Darwin. Ignore any one of them, and the system must go outside itself for repair.
In the case of Dreamworks, the discipline of choice is invention, most notably symbolized by the work of Steven Spielberg. By teaming up with Jeff Katzenberg and David Geffen, the idea was that their deployment skills would combine with his creativity to make a terrific studio. Alas, the deployers apparently became distracted, so Dreamworks never scaled the heights to which it aspired.
Enter two suitors. General Electric came first. It is a master of optimization. It’s view of the media sector is that it’s made up of a bunch of cowboys who need a good dose of six-sigma discipline. When the G.E. folks analyzed the cash flow of Dreamworks, especially when they factored in some of its latest misses, the initial valuation of the deal no longer computed, and they came back for a price reduction. That created an opening for a competitor. Nonetheless, it was totally correct procedure—for an optimization-oriented deal.
Now enter Paramount. It approached Dreamworks as a deployment opportunity. In that light who cares about the misses, it’s all about making the biggest bang you can from the hits. Spielberg may not make a hit every time, but his batting average rivals a Barry Bonds. You can’t do better than that, and Paramount, starving for good hitters, was quick to pay up. It is confident its deployment engine can generate profits from the hits that more than make up for the misses.
So who was right? Well, in one sense they both were, because both GE and Paramount played the game according to their own lights. In this case, I’d argue the better fit was with Paramount because Dreamworks looks to me more like a deployment than an optimization opportunity. Deployment cultures typically must acquire their inventions to keep them thriving (think of how well Cisco did this in the 1990s), and so Paramount is doing what is normal for it to do. Optimization cultures, by contrast, are better served buying up flagging enterprises in solid markets and then installing the kind of management practices required to thrive. Lots of GE acquisitions fit this mold, but not Dreamworks.
Ideally a company would be able to balance all three disciplines in a continual cycle of invention, deployment, optimization, with the last focused on generating the cash and freeing up the management resources needed to reinvest in the first two. But no company is able to fire on all cylinders all the time—hence the value of an ongoing M&A capability. The key principle to follow there is to acquire the kind of companies you can digest and not to let your competitive juices lead you to swallow something you can’t.