While I was convinced that the merger of Sears and Kmart may create shareholder value, I am getting somewhat concerned that the merger mania is back in the United States. Symantec/Veritas, Oracle/PeopleSoft, Nextel/Sprint, etc. are a few names to mention. It is no secret among strategists that mergers and acquisitions destroy value. The only exception is when a merger enables you to rapidly enter a new market/geography.
Why are mergers still popular?
Why are mergers still popular?
- Allows the top management to have a sense of accomplishment and gives them something to do when business is otherwise dull. And by the way, it is the easiest way to improve the income statement, when things are otherwise not working.
- Enables companies to eliminate competition and gain market share. Consolidation in a sector may give short-term boost to the participants, it does not help anyone in the long run. Fewer players and less competition generally means less value created for customers and shareholders and innovation drops sharply. Eventually, these behemoths then try to figure out how to get rid of businesses that are underperforming. The chemical industry provides a great case study.
- Is a great distraction from the troubles of the company and gives 2-3 years of time to the management to get things right.
- Don't look for shortcuts to growth. Develop a growth strategy whose foundation is new offerings and markets rather than acquisitions. Acquisitions should only be a vehicle for growth, not growth itself.
- Keep personal feelings out of business decisions. Never go acquire someone because you want to (Larry Ellison, please take note!) or it will make you feel better now that you are the CEO of a larger company.
- Learn to face competition. Not only will you make your company stronger, you will also drive innovation and create more shareholder value.
Recommended article: How to develop a competitive strategy?