In his Discourses on Livy, Machiavelli addresses the topic of acquisitions. Having defended Rome’s internal orders from its criticisms in Book I, he turns to defending its external orders in Book II. Machiavelli rejects the writers’ assertion that Rome’s empire was more the result of fortune than virtue. In doing so, Machiavelli outlines the common pitfalls of acquisitions and how remunerative acquisitions can be when done from prudence and not from avarice. Because Machiavelli’s analysis of acquisition is as much a reflection on human nature, and while times have changed, human nature has not, in many ways Machiavelli anticipated the flaws and failures seen in today’s practice of corporate mergers and acquisitions.
First, Machiavelli addresses what kind of person is mostly likely to instigate an acquisition. For the generality of men, ambition is the predominate impellent to acquire. Contrary to conventional wisdom, Machiavelli argues that it is he who already possesses things – not someone who does not possess anything – that has the greater desire to acquire. Machiavelli writes:
“There it was much disputed which is the more ambitious, he who wishes to maintain or he who wishes to acquire; for either one appetite or the other can be the cause of very great tumults. Yet nonetheless they are most often caused by him who possesses, because the fear of losing generates in him the same wishes that are in those who desire to acquire; for it does not appear to men that they possess securely what a man has unless he acquires something else new” (Book I.5).
Underlying Machiavelli’s assertion is his assumption that the fear of losing not only generates the same wish that is in those who wish to acquire, but that this fear is keener and more impelling than the other, which is a mostly a velleity. Moreover, he who possesses is more able, not just more ambitious, to acquire because he possesses a base which to leverage for a new acquisition. One sees this in today’s times, where most acquisitions are driven by management, full of ambition from avarice, who seek to appease rapacious bankers, celebrity activists and short-term shareholders to secure their own employment and generate higher compensation from the acquired revenues, despite the possibility of value destruction from the acquisition.
Additionally, Machiavelli notices not only the kind of person who is more disposed to acquire, but that it varies with the times as well. In particular, Machiavelli observes that acquisitions from ambition arise when times are good. According to Machiavelli, human appetites are insatiable, for since from nature they have the ability and the wish to desire all things and from fortune the ability to achieve few of them, there continually results from this a discontent in human minds and a disgust with the things they possess. Machiavelli continues:
“it is the verdict of the ancient writers that men are wont to worry in evil and to become bored with good, and that from both of these two passions the same effects arise. For whenever engaging in combat through necessity is taken from the men they engage through ambition, which is so powerful in human breasts that it never abandons them at whatever rank they arise to. The cause is that nature has created men to that they are able to desire everything and unable to attain everything. So, since the desire is always greater than the power of acquiring, the result is discontent with what one possesses and a lack of satisfaction with it” (Book I.37).
Because of the insatiability of human appetites, acquisitions from ambition arise when times are good because men become dissatisfied with what they possess they govern themselves poorly. They grow in vain and intoxicated by good fortune by attributing all the good they have to the virtue they have never known. Because they use fortune badly in this way, Machiavelli says “From this arises the variability of their fortune” (Book I.37). Similarly, one need not strain to see that acquisitions from ambition are abundant when times are good and fewest when fortune reverses herself. For when times are good, balance sheets become bloated. Because of the ambition of management and avarice of activists, precipitousness trumps prudence. Not only are these acquisitions most costly because good times give to generous multiples, the irritability of management does not allow them to consider how the times might vary.
Second, beginning with Book II Machiavelli defends the external orders of Rome. By external orders, Machiavelli refers to the modes and orders of diplomacy and warfare. Many writers of history, notably Plutarch and Livy, had the opinion that the Roman people in acquiring the empire was favored more by fortune than by virtue for they never had two very powerful wars combined at the same time. They conjecture that had Rome faced two difficult adversaries simultaneously instead of successively, the Roman Republic would have been ruined. Contra Plutarch, among others, Machiavelli asserts that the Romans owed their success – hence, their empire – to extreme virtue and not to fortune. Machiavelli writes:
“For if there has never been a republic that has made the profits that Rome did, this arose from there never having been a republic that has been ordered so as to be able to acquire as did Rome. For the armies’ virtue made them acquire the empire; and the order of proceeding and its own mode found by its first lawgiver made them maintain what was acquired” (Book II.1).
According to Machiavelli, it was not possible for an empire to emerge as great as that acquired by the Roman Republic via fortune. Instead, it was made possible by the good foundation laid by Romulus (see Machiavelli’s Discourses on Livy: On Good Foundations) and acquired by the virtue of Roman arms (see Machiavelli’s Discourses on Livy: On Adversaries), and maintained by their prudence (see Machiavelli’s Discourses on Livy: On Virtue vs. Fortune). Machiavelli summarizes thus: “whoever considers well the order of these wars and the mode of their proceeding will see inside them a very great virtue and prudence mixed with fortune. Therefore, whoever may examine the cause of such fortune will easily recover it” (Book II.1). What I intend to argue via Machiavelli’s analysis of Roman virtue is a model for acquisitions well done; for their virtue and prudence in acquisition were unrivaled.
Machiavelli begins by addressing the criticism levied by Plutarch. It was not merely good fortune that the Romans never had to fight two great adversaries simultaneously rather than successively, but rather a product of their prudence and virtue. Machiavelli asserts that the Romans acquired the goodwill of certain adversaries in order to acquire the tangible asserts others. While goodwill is unreliable for he who relies on it, the Romans did not rely on it, but sold it for tangible benefits – that of time. In so doing, they temporized their adversaries, only to overcome them at a later time when they were at greater strength. Machiavelli elaborates:
“For it is a very certain thing that as soon as a prince and a people come into so much reputation that every neighboring prince and people is afraid for itself to assault it, and fears it, it always happens that none of them will ever assault it if not necessitated to do so. So it will be almost the choice of that power to make war with whichever of its neighbors it likes, and to quiet the others with devices. And, partly out of respect for its power, party deceived by those modes that it used to put them to sleep, those are easily quieted. Those other powers that are distant and do not have business with it care for the thing as a distant affair that does not belong to them. They stay in that error this fire comes near them; when it has come, they have no remedy to eliminate it unless with their own forces, which then are not enough, since it has become very powerful” (Book II.1).
When a republic or corporate becomes powerful, its adversaries will be fearful to attack due to the expectation of retaliation. Thus, they will only attack if necessitated and will opt for the goodwill of the powerful in the meantime. Thus, it enables the powerful to select those enmities that are most favorable. This is what the Romans did. Other successful businesses have done the same. One can take Amazon, for instance, and see how much fear they inspired for many adversaries. It allowed Amazon to acquire the goodwill of certain adversaries in order to wage competition on others. Thus, having acquired more scale and ability, Amazon was able to reneg on its charity and overcome the competition it allowed having temporized it. Had the competition – just as Rome’s adversaries – realize how imprudent it was to acquire uncertain short-term relief in exchange for certain long-term peril, they would have realized that there is no other mode more necessary to defend one’s freedom than steel – that is, the Roman way.
Machiavelli affirms that it could not have been possible for Rome to acquire what they did owing to fortune and not virtue. For the adversaries that Rome conquered were everywhere armed and very obstinate in their defense. Thus, it was only by the Romans’ extreme virtue – a level of virtue that I do not know if he attributes anywhere else – that they were able to acquire their empire. Machiavelli writes:
“in every least part of the world the Romans found a conspiracy of republics very armed and very obstinate in defense of their freedom. This shows that without a rare and extreme virtue the Roman people would have never been able to overcome them” (Book II.2).
Similarly, when one considers the merit of certain achievements, one can see whether success owes more to virtue or fortune by the difficulty or ease of those accomplishments. Thus, when one compares the returns of a virtuous and prudent man, such as Seth Klarman, to those of a very fortunate man, such as Peter Lynch, one sees that the times were very accommodating in the latter as was the ease of accomplishment. Thus, the superior risk-adjusted returns lie with the former.
One of the modes that many Rome very successful in acquiring and maintaining their empire was their custom of extending citizenship to those who they acquired. This allowed them to not only acquire land, but also loyal inhabitants. The abundance of citizens allowed Rome to oversee its empire and gave them a large body from which virtuous captains could emerge, such as Fabius Maximus. As Machiavelli writes, “Those who man for a city to make a great empire should contrive with all industry to make it full of inhabitants, for without this abundance of men one will never succeed in making a city great” (Book II.3). Similarly, one needs an abundance of skilled managers to oversee and manage each acquisition and investment. One can look at the example of John Malone, whose prudence has enabled him to acquire while his recruitment of leading operators has enabled him to maintain and grow. Additionally, one needs an abundance of cash flow as well to support one’s acquisition and make the necessary investments to defend it from competition. Acquisitions of assets that themselves do not produce any or sufficient cash flows are inherently speculative.
Machiavelli illustrates these points via metaphor and history. He cites the example of Sparta and Venice, oligarchies that were highly restrictive and hostile to immigration. While this allowed the nobles to maintain their power for many centuries, this power was necessarily restricted to their polis. For their small size did not allow them to acquire empire. Citing history, Machiavelli points out that as soon as Sparta and Venice acquired a dominion, they immediately lost it because their modes and orders did not enable them to maintain acquisitions. Machiavelli writes:
“And since all our actions imitate nature, it is neither possible nor natural for a thin trunk to support a thick branch. So a small republic cannot seize cities or kingdoms that are thicker than it. If, however, it seizes one, what happens is as with a tree that has a branch thicker than the stem: it supports it with labor, and every small wind breaks it” (Book II.3).
Comparing the model of Sparta and Venice to a thin tree trunk, Machiavelli notes that it is not possible for a thin trunk to support a large branch. While it might appear possible on a spreadsheet, the slightest winds break it. Here, Machiavelli provides cogent insight into the fundamental flaws of levered acquisitions, such as LBOs and roll-ups. For these modes acquire large branches, but because their stems are so little because they cannot support the acquisition with cash flows, they work only when the times are favorable, but break with every gust. And when they break, it is not only the branch that is harmed, but it can be fatal for the stem as well.
The virtue and prudent of the Romans was the opposite of the Spartan and private equity models of acquisition. As Machiavelli notes, “In every action of theirs it will be seen with how much prudence they deviated from the universal mode of others so as to make easy for themselves the way to arrive at a supreme greatness” (Book II.6). Rome was contrarian to the times – or, in truth, to human nature – because of their extreme virtue. Thus, the Romans did not acquire out of ambition, as has always been conventional among the generality of men, but did so out of prudence. Machiavelli elaborates:
“The intention of whoever makes war through choice – or, in truth, ambition – is to acquire and maintain the acquisition, and to proceed with it so that it enriches and does not impoverish the country and his fatherland. It is necessary, then, in acquiring and in maintaining not to think of spending but instead to do everything for the utility of his public. Whoever wishes to do all these things must take the Roman style and mode” (Book II.6).
The extreme virtue of the Romans not only lay in their arms, but in their modes and orders, which incentive the consuls to act for the benefit of the fatherland and not out of private interest. Because of their short term limit, it kept wars brief as the consuls sought triumph during their term. Moreover, the way in which the Romans distributed booty to the public treasury and sent colonies to lower the maintenance expense of acquisition ensured that acquisitions were profitable for the fatherland. Thus, the Romans “became ever richer and more powerful” (Book II.6).
Congruous to the prudent principles of acquisition, the Romans saw siege warfare as inimical and insalubrious. Siege warfare, as Machiavelli elucidates, is not for the parsimonious. For siege warfare is both exorbitant and inordinate in time and resources. Thus the Romans, in their propriety and prudence, avoided situations of siege warfare so not to expend themselves for small gains. As Machiavelli writes:
“[The Romans] always made it [war] with every advantage, both as to expense and as to every other thing sought in it. From this it arose that they guarded themselves from taking towns by siege, for they judged the expense and inconvenience of this mode to be so great as to overcome by far the utility that could be drawn from what it acquired” (Book II.32).
Like the Spartan and private equity and activist models, engaging in siege warfare requires the acquirer to pay a premium for their acquisition. Thus, whatever value was to be acquired is negated by the expenses incurred. As the Romans observed: “For in a siege, there are length and expense… They saw that with a defeat of an enemy army they acquired a kingdom in a day, and in taking an obstinate city by siege they consumed many years” (Book II.32).
The greatness of the Romans is better understood when juxtaposed with the poor examples of the modern princes of Machiavelli’s time. Contrary to the prudence of the Romans, the modern princes and republics engaged in acquisition for their own ambition. They acquired when they did not have sufficient arms to do so, or when they had arms, blinded by ambition, they allowed wars to be prolonged thus depleting their arms, making maintenance difficult and the acquisition more harmful that what was obtained. As Machiavelli summarizes:
“Whoever governs himself otherwise [to the Roman way] seeks not his life but his death and ruin, for in a thousand modes and from many causes his acquisitions are harmful. For he very likely acquires empire without forces, and whoever acquires empire without forces will be fittingly ruined. Whoever impoverishes himself through wars cannot acquire forces, even should he be victorious, since he spends more than he obtains from his acquisitions” (Book II.19).
The Roman mode of acquisitions, as can be seen, in the spirit of having a margin of safety. For like the rare prudent and astute investors today, they intelligently weighed the risks and costs of each acquisition. Where the risk was low, the reward was high because of their mode of acquisition. They kept wars short and avoided conflicts that would be prone to be dragged out so as to reduce the expense of acquisition. By enriching the fatherland with the booty acquired and sending out self-sufficient colonies to manage the new acquisitions, they kept the costs of maintenance low. Similarly, one sees that virtuous investors and managers today, though few, acquire where the expense is not high and that the benefits to their patria is greater than the costs incurred. They acquire with sufficient cash and cash flow on hand, without relying on leverage. They send out skilled operators to make sure than the maintenance of the acquisition is self-sufficing so as not to ruin the patria and to provide, but rather provide cash flows for their benefit. Those unlike these acquire from ambition, they lack the cash and cash flow on hand so they leverage up, exposing their patria to great risk, and ultimately, ruin.
While history has changed and grown, human nature has remained unchanged and stagnant. Thus, the same mistakes are repeated. Citing the Roman virtue in acquisition, Machiavelli professes, “And if this mode of expanding does not please them, one should think that acquisitions made by any other way are the ruin of republics, and should put a check on every ambition” (Book II.19). That is, any acquisition made not for the benefit and utility of the fatherland, prudently judged, will cause more expense than what is acquired. But Machiavelli knew that the Romans were the exception and not the rule in history, for princes and republics continue to make the same mistakes in acquisition by adhering to ambition. Machiavelli writes:
“For all arose their having wished to acquire and not known how to take up the mode to do so. They deserve more blame inasmuch as they have less excuse, since they saw the mode the Romans took and could have followed their example, while the Romans, without any example, by their own prudence, knew how to find it themselves” (Book II.19).
Even though the histories are full of these failures, princes still repeat these mistakes for they ignore the lessons of history contrary to their desires and inclinations, as Machiavelli says, “And although the histories may be full of it, they still would not have lent it their faith” (Book II.19). All too similarly, managers, bankers, and activists continually repeat the same mistakes of their predecessors in acquisition. History shows that by and large, acquisitions are net destroyers of value, that synergies rarely materialize up to expectations, that integration is difficult, among numerous other obstacles incurred in acquisition. One can tell a manager, banker, or activist this by pointing out infinite examples in history, but they do not lend it faith stemming from their own ambition and hubris. So much was the virtue and greatness of the Romans, who not having history as a guide, were able to figure it out for themselves. Thus, one who wishes to acquire ought to follow the steps of those great figures before them, so that if one does not achieve the great heights of those predecessors, one may be able with the aid of so high an aim to hit the mark they wish to reach.