MERGERS AND ACQUISITIONS

From the book A Build-to-Order & Mass Customization@   Copyright 8 2008 by Dr. David M. Anderson

Mergers and acquisitions are often viewed as the magic elixir that will grow sales, enhance prestige, and some save cost through A synergies.@ However, mergers and acquisitions usually aren= t successful, cost more than projected, and demand so many resources that they distract from really effective activities like the Cost Reduction Strategy outlined on the home page.
 

In Jim Collins= book on how good companies become great companies, appropriately titled, Good to Great, he states flatly that A you absolutely cannot buy your way to greatness.@ ¹

Yet many companies have tried to grow by mergers and acquisitions. A Wall Street Journal article cited problems of A serial acquirers@ and questioned the strategy trying to grow by doing deals:

A The troubles of the serial acquirers raise new questions about the growth-by-acquisition strategy that enthralled so many companies and investors during the bull market.@²

A Thomson Financial/First Call study commissioned by the Wall Street Journal study found that A stocks of the top 20 acquirers in the late 1990s have fallen nearly twice as much as the Dow Jones Industrial Average and the Standard & Poor= s 500 Index.@³  An A.T. Kearney study of 115 global mergers in the mid 1990s showed that the total return to shareholders (relative to peer companies) was minus 58%!⁴

Growth by acquisition is hard to sustain. A Business Week cover story about General Electric summed up the problem:

A About 15% of GE= s earnings growth came from acquisitions last year. But because these are one-time events, it has to gobble more companies each year to keep up the pace.@⁵

That same article reported what happened when one of the financial community= s most admired figures, Bill Gross, accused GE of A inflating earnings through acquisitions and cheap debt rather than through organic growth;@ GE= s stock fell 6% in two days.⁶

The odds are not favorable for success in mergers and acquisitions. According to KPMG research, only one in five deals lives up to its expectations.⁷   Time and cost estimates are usually unrealistic; Professor Thomas Lys of the Kellogg Graduate School of Management at Northwestern University, says: A It costs twice as much and takes twice as long as you planned.@⁸
 

One of the reasons for the poor financial performance of mergers and acquisitions is that the often touted A synergies@ come at a significant cost for downsizing, coordinating the integration, training, relocations, and other overhead costs. Dartmouth= s Finkelstein, writing in his thorough study of business failures, offered the following guideline:

A As a rule of thumb, synergy realization costs often come in at two to three times the value of annual synergy benefits.@ ⁹

Therefore, it would take two to three years to breakeven on the projected synergies, assuming that they really can be effective at all. And during that time, the merger or acquisition is diverting focus from other opportunities, like the Cost Reduction Strategy cited on this site= s home page (see later section on M&A Distractions).

But, despite the odds, many companies still try to acquire or merge with competitors to try to gain A pricing power@ or A economies of scale@ and are lured into this apparent panacea because quantify parts cost but do not quantify all the total costs including the real cost of the merger and all the overhead costs involved in bulk purchases.

However, upon deeper analysis, merging two mass producers would provide a benefit only if the merged companies used the same parts and same processing equipment, which is highly unlikely. Even if some parts were the same, the pricing power would only be realized for centralized procurement, which still has all the overhead costs and inventory problems associated with purchasing and distributing parts, often to multiple sites. This approach is the opposite of the spontaneous supply chain principles of automatic resupply which arrange for local suppliers to keep the bins full (and bill the company at the end of the month) and thus avoid A purchasing@ all together.

The biggest dangers from merging with or acquiring competitors is allowing dissimilar products to be built in the same plant. If there was a A Murphy= s Law@ of mergers, it would surely emphasize the unlikely probably of any similarity or commonality of parts, materials, or processes. Merging two dissimilar product lines into the same factory would probably double the variety of parts and raw materials, which would thwart any progress made toward standardization. It would also create massive and costly efforts to translate documentation and create setbacks to setup up reduction efforts. In production, such a merger would present the dilemma of acquiring duplicate, dissimilar equipment and tooling or converting one product line= s equipment, tooling, and procedures. In summary, merging two dissimilar product lines into the same factory would be a big step backward for lean production, build-to-order and mass customization.

Although the greater sales numbers may seem intoxicating, the hoped for synergies may prove more elusive than real, especially if the merged companies do not have advanced business models. Writing in the Wall Street Journal, Jim Collins summarized his philosophy is that A two big mediocrities never make one great company.@¹⁰
 

A big problem with mergers and acquisitions, especially among competitors, is the distractions they cause from more worth while efforts like the Cost Reduction Strategy. When General Mills acquired Pillsbury, it slashed promotions and new product development to concentrate on integration. A half a year after the merger was completed, CEO Stephen Sanger admitted, A It= s obvious that the focus on integration has taken its toll on our sales growth and our earnings growth.@¹¹

Hewlett Packard and Compaq spent over one million man-hours in just integration planning B not including the actual integration.¹²  To put this into perspective and do the proverbial math, one million man-hours is equivalent to 1,000 people working full time for half a year. How many companies have an extra million man-hours to spare? The obvious answer is that companies don= t have any man-hours to spare, so what that means is that the merger integration has distracted them from what they were hired to do B important tasks like lowering cost, improving quality, product development, marketing, customer relations, and enhancing truly competitive business models that can generate growth, not just buy it.

One of the justifications for that merger was to become the largest PC maker and thus compete better with Dell Computer. But while Hewlett-Packard and Compaq were busy planning and merging, Dell= s uninterrupted focus on growth soon surpassed the sales of the merged HP/Compaq, Dell starting marketing printers to challenge HP= s cash cows, and, a year later, Dell was rated highest in customer satisfaction for desktop PCs (for the 12^th time in 13 years) in PC magazine= s user satisfaction survey of 18,000 subscribers. Dell received an A A+@ grade, while both HP and Compaq got an A E@ B the lowest possible grade.¹³

The American Customer Satisfaction Index, published by the University of Michigan Business School, reported in 2003 that Dell had the top ranked score with 2.6% increase, Apple increased 5.5%, but Hewlett-Packard was one of two PC makers whose score dropped.¹⁴

Even more distractions will come from layoffs that are usually part of the overall A cost savings@ promised when pitching the deal. There are several compelling reasons not to lay off people in general.¹⁵  Laying off people in the midst of the major upheaval of a merger or acquisition adds even more distractions. In the case of Hewlett-Packard= s expected 15,000 job cuts, the above cited Business Week article referred to A a cloud of uncertainty that has left many of HP= s 145, 000 workers in limbo.@ The Business Week article about the General Mills/Pillsbury acquisition said that: A Many Pillsbury salespeople had left, unsure of whether they would have jobs, and retailers were unhappy about the lack of support Pillsbury goods were getting.@¹⁶

Unfortunately, companies distracted by M&A limbo and integration tasks are not focusing on improving their overall business model. One of the ambitious A idea practitioners@ profiled in a book on implementing business ideas, Lawrence Baxter, commented about the climate when his company, Wachovia Corporation, was merging with First Union Bark:

A We had a lot of very difficult and complex operational issues to address during the merger. There was a very clear focus on integrating the banks over a certain time period. It wasn= t a time to explore new ideas that might add risk to the organization.@¹⁷

But, competitors that are not distracted by mergers keep on innovating. While HP was merging with Compaq, Dell gained market share with their more advanced assemble-to-order/ship-direct business model. And, while HP and Compaq were integrating, Dell was innovating and making plans to offer its own products for handheld computers and printers, which presents new competition in a key market for Compaq and in HP= s most profitable product line.¹⁸

Some companies credit steering clear of mega-mergers as their formula of success. Peugeot has resisted A merger mania@ in the automobile industry and became one of the most profitable car manufacturers outside of Japan.¹⁹  CEO Jean-Martin Folz argues that the key to success these days is A not amassing economies of scale with a merger, but producing innovative cars in rapid succession.@ Mr. Folz= s views coincide with the theme of this section: A Managers can= t crank out that many products if they= re struggling to integrated two companies.@ Undistracted by mergers, Peugeot launched 25 new vehicles between 1999 and 2002. Between 1998 and 2002, when many car manufacturers were struggling, Peugeot= s European market share climbed four percentage points and its sales climbed 62% which made it the world= s sixth-largest car maker B ahead of Honda and Hyundai.
 

Jim Collins said that great companies A used acquisitions as an accelerator of flywheel momentum, not a creator of it.@²⁰  For Lean Production and Build-to-Order, appropriate acquisitions, mergers, and alliances would be up and down the supply chain.²¹  Upstream acquisitions may be one solution to unresolvable part lead time problems; the other solution would be bringing production in-house, as discussed in the Outsourcing article. Upstream acquisitions may also be a way to gain better control of total cost, quality, and delivery in general.

Downstream acquisitions may be a way to capitalize on the ability to quickly make products on-demand, if existing distribution channels do not take advantage of such an opportunity.

Another category of appropriate mergers and acquisitions would be those that are supportive, for instance, complimentary product lines, marketing prowess, or distribution channels. Examples of complimentary products include combining production of out-of-season products like heaters with air conditioners and lawn mowers with snow blowers. This can help level the production loads and keep a stable workforce productive all year.

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ENDNOTES/REFERENCES (See below)
 

For more information call or e-mail:

Dr. David M. Anderson, P.E., fASME, CMC
www.HalfCostProducts.com
phone: 1-805-924-0100
fax: 1-805-924-0200

e-mail: anderson@build-to-order-consulting.com
 

Copyright © 2016 by David M Anderson

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1.  Jim Collins, Good to Great; Why Some Companies Make the Leap . . . and Others Don’t, (2001, Harper Business), see the section: “The Misguided Use of Acquisitions” pp. 180-181.

2. Robert Frank and Robin Sidel, “Firms that Lived by the Deal in the 90's, Nos Sink by the Dozens,” Wall Street Journal, June 6, 2002, citing a Thomson/First Call study done for the Wall Street Journal.

3. Ibid.

4. Jeffery L. Hiday, “Most Mergers Fail to Add Value, Consultants Find,” Wall Street Journal, October 12, 1998.

5. Diane Brady, “The Education of Jeff Immelt,” Business Week, April 29, 2002; Cover story.

6. Ibid.

7. Michael Arndt, Emily Thornton, and Dean Foust, “Let’s Talk Turkeys; Some mergers were never meant to be,” Business Week, December 11, 2000, pp. 44 - 46.

8. Ibid.

9. Sydney Finkelstein, Why Smart Executives Fail and What You Can Learn from Their Mistakes, (2003, Portfolio/Penguin), p. 96.

10. Jim Collins, “Beware of the Self-Promoting CEO,” Wall Street Journal, Editorial page, November 26, 2001.

11. Julie Forster, “General Malaise at General Mills; Rivals have been eating its lunch since the Pillsbury deal,” Business Week, July 1, 2002, pp. 68 - 70.

12. Cliff Edwards with Andrew Park, “HP and Compaq; It’s Showtime; The Cost-Cutting Looks Doable, But Other Synergies May be More Elusive than Expected,” Business Week, June 17, 2002.

13.  “HP, Compaq Fail PC User’s Test,” Los Angeles Times, July 10, 2003, p. C3.

14.  Wailin Wong and Jane Spencer, “Web-Portal Satisfaction Rises,” Wall Street Journal, August 20, 2003, page D2.

15. David M. Anderson, Build-to-Order & Mass Customization; The Ultimate Supply Chain Management and Lean Manufacture Strategy for Low-Cost On-Demand Production without Forecasts or Inventory, (2008, 512 pages, CIM Press, 1-805-924-0200); see “Downturn Strategies,” pages 441 - 450.

16. Julie Forster, “General Malaise at General Mills; Rivals have been eating its lunch since the Pillsbury deal,” Business Week, July 1, 2002, pp. 68 - 70.

17. Thomas H. Davenport and Laurence Prusak with H. James Wilson, What’s the Big Idea? Creating and Capitalizing on the Best Management Thinking, (2003, Harvard Business School Press), page 133.

18. Andrew Park, Faith Keenan, and Cliff Edwards, “Whose Lunch Will Dell Eat Next?,” Business Week, August 12, 2002, pp. 66-67.

19. Neal E. Boudette, “Peugeot’s Formula for Success: Steering Clear of Megamergers,” Wall Street Journal, August 4, 2003, front page, column 5.

20. Collins, Good to Great, p. 180.

21. Anderson, Build-to-Order & Mass Customization, Chapter 13, Sections 5, “Expand Downstream,” and Section 6, “Expand Upstream,” page 435.