We used to represent a strategic consulting firm called The Smart Organization. Its founders became 
evangelists speaking out against merger mania by telling anyone in business (who would listen) that most mergers take place simply for financial reasons, cost efficiencies and because the acquired company is brain dead. Often, the acquirer would actually harvest the most appealing parts of this non-strategic entity and deep six the rest.
What was (and continues to be) missing is any type of strategic plan as to how both companies can integrate to create more appealing products, take a leadership position and truly have sustainable, profitable growth.
I thought about The Smart Organization's leaders today as I read the latest Chrysler/Cerberus acquisition news. It made me realize just how spot on they are.
Daimler failed in merging with Chrysler. Time Warner's acquisition of AOL has been a disaster. HP's takeover of Compaq proved to make little sense. Morgan Stanley's marriage to Dean Witter didn't work. We can even go as far back as Compaq's take over of Digital Equipment as a prime example of the worst kind of deal. And, the list goes on and on…
The common theme running through all these moves was “bigger is better." Regardless of whether the cultures, products or combined business strategies made sense, these companies were acquisition hungry to become larger.
Yet, in most cases bigger means bloated, dysfunctional management, unhappy employees and contrary to the merger's initial goal, costs continue to rise while highly touted profits never materialize. In the case of companies like Time Warner, Daimler and HP, their reputations also took a severe beating on Wall Street and with customers because they jeopardized quality, their own unique point of differentiation and a leadership position.
In the end, the only ones who make out are the investment bankers, arbitrage traders and those high enough within the acquired company who feasted on their equity sales.
Fortune Magazine recently featured a story about the new rules of the game in business The very first rule (which I believe) is that it's not about size, but innovation and the ability to change quickly as markets and customers' needs evolve. I can think of no better living example of this than Google.
I know in the public relations agency industry, clients want strategic thinking and results. Having 60 global offices through 15 acquisitions and ultra hi-tech, fancy presentations are seen as superficial and meaningless if an agency can't achieve ROI. That's why we'll continue to see smaller entrepreneurial firms that can establish a clear niche and can flexibility stay ahead of clients' needs do very well.
A number of these firms will "get it right" and begin to scare the daylights out of their much larger brethren as they grow, take market share and become the new industry leaders.
I think a good part of the problem is the endemic belief that a company must keep growing--and that if it's not, something is wrong with it.
When a company gets large enough, it becomes very difficult to deliver impressive organic growth--the same absolute level of revenue increase yields smaller and smaller % growth. For example, $10mm growth (from, say, a new product or service) is 20% growth for a $50mm company, 2% for a $500mm, and not even a rounding error for one that's $5 billion.
The only way to get quantum, as opposed to "merely" incremental growth, short of inventing a truely killer app, is to acquire and/or merge.
Analysts and many instutional investors want high levels of growth. C-suite inhabitants make money on their options when the Street rewards a growing company with higher stock prices, and bonuses may also be tied to growth targets. Executives are celebrated for bold strategic plays, not often for simply being good stewards of a sound going concern.
As long as growth remains the Grail of corporate America, there'll be tendency to overvalue mergers and acquisitions.
BTW, this is NOT to say that growth is bad--as long as its in the service of profit, sound strategic goals, etc. But size for size's sake is overvalued.
Posted by: Steven Zweig | May 18, 2007 at 03:59 PM