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drivers of M&A
This page discusses some drivers of merger, acquisition
and disposal activity as an aid in understanding recent
telecommunication booms/busts and the dot-com bubble.
It covers -
It
is complemented by a note on the private
equity fund industry.
introduction
Journalism on the dot-com and telecommunication bubbles
has often highlighted monumental valuations of enterprises
in the 'new economy' and the awesome disappearance of
much of that value, with billions of dollars evaporating
in a way that left only a memoir or two, a server farm
and the Aeron chairs behind.
More recent deals have featured staggering amounts, with
global figures for announced M&A in the first half
of 2007 at US$2.8 trillion, up from US$1.9 trillion in
the first half of 2006.
As US politician Everett Dirksen (1896-1969) quipped about
the US Budget
A
billion here, a billion there, pretty soon it adds up
to real money.
The
following pages of this note highlight where some of the
money has gone.
In examining corporate mergers, acquisitions, deacquisitions
and collapses over the past century it is possible to
identify a number of drivers. They include -
- a
search for economies of scale and scope
- problems
with diseconomies of scale and scope
- personal
and corporate aggrandisement
- expediency
and fashion
- access
to capital, favourable tax regimes and M&A-friendly
competition policy
Economist
Joseph Schumpeter
(1883-1950) famously characterised capitalism as "creative
destruction", one of those phrases perhaps more quoted
than understood and less celebratory than claimed by neoconservative
epigones. Few commercial organisations have lasted for
more than three generations; many of the older businesses
have shifted focus several times during their period of
operation.
scale
An argument often used by proponents of mergers is achievement
of economies of scale in areas such as procurement, human
resource management, information systems, operations,
research and marketing.
A complementary argument is that takeovers build a bigger,
stronger business, one that -
- has
greater cash flow
-
is more likely to attract talented executives
-
will engage the interest of investors (and secure a
wider range of investors)
- will
be able to invest in training its personnel, in marketing,
in product development/enhancement or merely in expensive
capital equipment such as oil rigs, airliners and state-of-the-art
steel mills
- has
the strength to weather financial storms (Kuznets waves,
Kondratieff cycles or contingencies such as an inept
central bank or the demise of an ally)
- is
in a better position to take risks or "take the
long view"
In
practice achievement of such gains can be elusive. It
is arguable that economies of scale in some sectors can
be exhausted when enterprises reach a relatively modest
size, with investors in particular enjoying greater returns
through stakes in businesses that have stayed 'lean and
mean' rather than succumbing to gigantism or the distractions
of absorbing associates and competitors.
Critics thus warn of diseconomies of scale and loss of
focus, with senior managers for example experiencing difficulty
in identifying and interpreting details of an organisation's
activity, with consequent duplication of expense, failure
of internal controls, delays in decisionmaking and neglect
of problems. Coase,
in contrast to some of the Coasians, and Chandler
in The Visible Hand: The Managerial Revolution in American
Business (Cambridge: Harvard Uni Press 1977) noted
that for information acquisition, big was not necessarily
better. Others have commented that some major enterprises
are not taking the long view but instead are driven by
the tyranny of the quarterly return.
scope
Economies of scope have been claimed as another rationale
for M&A, with proponents arguing that 'related' enterprises
can -
- share
financial and technical resources resources
- exchange
managers
-
create opportunities for each another, for example 'cross-selling'
by bancassurance giants or shared promotion and merchandizing
by media conglomerates.
Fashions
in corporate strategy and the shape of major enterprises
come and go, which might lead to some scepticism about
rationality and the eternal truths peddled by management
schools (or merely by gurus
such as Tom Peters).
In practice opportunities are restricted by factors such
as -
- competition
policy
- the
non-fungability of much executive expertise (not all
corporate cultures and all markets are the same)
- inappropriateness
(consumers for example resist buying insurance from
a fast food outlet, even though that chain and its banking
associate are in the "business of service")
Fads
for industrial conglomerates appeared and departed during
the 1920s and 1970s. More recently we have seen the restructuring
of accounting groups that embraced corporate auditing,
management consulting and corporate law operations.
Interest in functionally-diverse financial groups - a
retail bank with a corporate bank with private banking
with funds management with insurance with a credit card
processor with mortgage provision - appears to be waning
as groups experience difficulty in fully using skills
and information gained through different relationships.
aggrandisement
A third reason for corporate pursuit of growth through
mergers and acquisitions is personal and national aggrandisement.
Chief executives want the gratification of running a larger
enterprise or merely the attention associated with a takeover,
subordinates on occasion see opportunities (albeit at
the expense of peers through post-aquisition 'right-sizing'),
corporate boards aspire to leadership and the pilot fish
- lawyers, management consultants, publicists, accountants
- see opportunities through capture or defence of their
client.
Others gratify their egos (and their wallets, along with
those of their backers) through what has variously been
characterised as asset stripping, downsizing or right-sizing.
Uncritical acceptance of 'muscular leadership' or charismatic
chief executives - exemplified in mid-career hagiographies
of Harold Geneen, Charles Bluhdorn, Samuel Insull, Jack
Welch, Al Dunlap, Jean-Marie Messier and Christopher Skase
- has been questioned in works such as Rakesh Khurana's
Searching for a Corporate Savior: The Irrational Quest
for Charismatic CEOs (Princeton: Princeton Uni Press
2002).
Governments (along with other voices such as business
journalists, industry organisations and academics) have
on occasion encouraged industry consolidation to -
- achieve
economies of scale through aggregation of small enterprises
into one of regional or 'world scale'
- rescue
individual ailing enterprises, resuscitate an ailing
industry or provide an escape route for investors
- build
'national champions' in industries that are perceived
to be of key national interest (steel, computer hardware,
software, biotechnology) in relation to national security
or as a driver of economic growth throughout the national
economy
- build
national champions in sectors with a symbolic value
(eg film in 1930s Britain)
That
consolidation may occur across borders, with some governments
endorsing - even encouraging - international expansion
and others (for example France and Spain) impeding acquisition
of major national enterprises.
next page (energy
and utilities)
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