Corporate Mergers and Acquisitions: New Game, New Goals
Excerpt from Mergers: Growth in the Fast Lane
The Big Shift
In today’s business world the game is growth. Ramping up. Getting bigger to get better. Some companies go at it conservatively, in incremental fashion. Other outfits shoot the works. Their game plan aims at exponential growth, and that usually means mergers and acquisitions . . . growing by leaps and bounds ... combining operations to get maximum market share, economies of scale, payback on technology investments.In other words, major upsizing, in high gear.
What’s driving this big shift toward dominating instead of downsizing?
Well, it’s that same old one-syllable word: change. But instead of struggling to cope with change, companies now are trying to conquer it. Today’s focus is on building. Buying. And because the world’s new, faster metabolism is catching hold, mergers are back.
Sure, shrinking and trimming will continue. We still need to squeeze out costs and soup up performance. But everybody’s doing that. And most folks have figured out that cutbacks, by themselves, won’t make you competitive for long. Having done some serious pruning, the corporate world now needs a good growing season.
Today’s Deals are Different.
In the 1980s, many deals were “financial plays.” In the 21st century, to a much larger degree, deal success depends on good integration management. The new game mandates operational effectiveness. So growth via mergers and acquisitions becomes a winning proposition only if the companies can be consolidated successfully. And only if the whole truly is greater than the sum of the parts. Or faster. Or cheaper. Or reaches more customers.
Financial gains are still the final target, of course, but they aren’t achieved when the deal is cut. Unlike in times past, today’s acquirers don’t simply strip away assets and maximize shareholder value in short order. Current mergers are looked at as longer term challenges.
Another difference—yesterday’s corporate marriages involved more diverse companies. Acquirers more frequently bought into different industries. Sometimes this was done to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment portfolio. Companies bought what they didn’t know. And what you don’t know, they learned, can kill you.
Subsequently, divestiture became the key word, but garage sale was more like it. A study of 33 major companies’ acquisition activities covering a 36-year span found that over 50 percent of their unrelated acquisitions were later divested.
Today’s trend is to acquire companies in the same business, or close to it. Firms that complement, that strengthen your capacity to serve customers. Companies vertically or horizontally related. Sometimes your fiercest competitors . . . or suppliers . . . even your customers.
But the risk is still there.
Research shows that related firms are sometimes even harder to assimilate. Why? The acquirer thinks it understands the other business, but often doesn’t. Or maybe both companies have the same types of people with similar skills, and that means redundancy. This is the dark side of synergy.
Soft Stuff is Harder to Merge.
These days acquirers aren’t necessarily hungry for the target companies’ plants, equipment, and other hard assets. Now they’re going after entirely different prizes. The new aiming points are a company’s core competencies. Its customers. Its distribution channels. Its content.
The hot prizes aren’t things—they’re thoughts, methodologies, people, and relationships . . .