I am looking forward to seeing the movie Moneyball, which was released in theaters last Friday. The film is based on Michael Lewis’s eponymous book, which I read some time ago. The book is about Billy Beane, the general manager of the Oakland Athletics, a major league baseball team that perennially had the smallest budget in the sport.
According to Lewis, the idea for the book “began, really, with an innocent question: how did one of the poorest teams in baseball, the Oakland Athletics, win so many games?” Richer teams could afford better players, and better players tended to win games. Hence, Beane was forced to ask himself, if the A’s weren’t going to exist for the sole purpose of getting beat by the league’s richer teams, how could they compete?
For years, statistics-obsessed baseball fans had shared observations about which players were best, and why. They relied on conventionally valued statistics, such as RBI’s (runs batted in) on offense, errors on defense, and ERA (earned run average) for pitchers. It was common wisdom that such data indicated which players were good and which were bad.
One fan, Bill James, wrote an obscure annual newsletter called Baseball Abstract, dedicated to showing that baseball teams overvalued such conventional statistics as RBIs and ERA. James noted that these statistics did not correlate to scoring runs or wins, and hence were overvalued. The consequence of overvaluing non-correlative traits, James observed, was that teams were therefore undervaluing traits that statistically correlated more closely to scoring, such as on base percentage and slugging. Other fans and writers applied to the same analytical approach to evaluating players’ other traits.
In the 1980’s, A’s General Manager Sandy Alderson, a Harvard-trained lawyer, had started to apply these stochastic methods to player selection. Billy Beane replaced Alderson in 1998 and immediately began running the A’s using the stochastic approach favored by his former boss and mentor. Beane reasoned that the only way he could field a competitive team with a substantially smaller budget was by jettisoning age-old concepts of value and by applying good management and stochastic analysis.
Every year, the A’s won more games. Today, every MLB club plays, to some extent, what has come to be called “Billyball.
Years ago, at about the same time Beane was experimenting on the A’s with Jamesian theory, I was chatting with a friend, the CEO of a mid-sized company, about his proposed plan to grow the company through acquisition. The CEO had heard, as we all have, that cultural fit is important to successful integration. He concluded that he would only acquire a company that had a perfect cultural fit.
He had identified a valuable trait and overvalued it. By doing so, he had undervalued the role of the acquirer’s management team in managing culture. Organizational culture is important. And in an acquisition context, cultural fit between two organizations is a predictor of integration success. However, new cultural values can be learned.
Good management teams establish and communicate organizational values that advance the company’s mission, differentiate the company from competition, and energize the workforce. But if an acquirer overvalues cultural fit, it essentially undervalues its ability to create value by establishing and leading the culture of the combined entity. And creating value is the central object of acquisitions.
There may be many other examples of conventional but imperfect thinking in mergers and acquisitions. If Billy Beane was a deal-maker (and he was), he might say: reconsider conventional wisdom, be objective and look for undervalued traits.