The Dubious Logic of Global Megamergers
Many of today's huge—and pricey—cross-border mergers are based on a mistaken assumption, write Pankaj Ghemawat and Fariborz Ghadar in the Harvard Business Review. In the face of globalization, they say, companies may have better alternatives than the pursuit of the big deal.
Editor's Note— The assumption that industries will become more concentrated as they become more global, that the global economy is a winner-take-all economy, has become common wisdom. But, according to Pankaj Ghemawat and Fariborz Ghadar, empirical research indicates that global—or globalizing—industries have actually been marked by steady decreases in concentration since World War II.
Executives, they write, "need to break free of the biases that lead them to pursue larger and larger cross-border deals. There are better, more profitable strategies for dealing with globalization than relentless expansion."
In this excerpt, they detail seven such strategies that corporate leaders can pursue.
Pick Up the Scraps. As Peter Drucker recently noted, for every megamerger or large acquisition, there are usually several spin-offs, divestments, or asset sales that can give companies—especially smaller ones—lots of growth opportunities. The 1998 merger of BP and Amoco, for example, led to the disposal of 12 oil-storage terminals scattered across North America. The terminals were purchased by the Williams Companies, a small business compared with BP Amoco but hardly an insignificant one. In 1998, Williams had nearly $8 billion in sales. The oil industry is becoming more competitive in part because of such cast-off purchases by companies like Williams.
Stay Home. For many companies, it still makes a lot more sense to grow domestically or regionally than to try and establish a global presence. Think of Maytag and Lloyd's Bank; both companies have prospered by focusing on their home markets of the United States and Great Britain, respectively. Telefónica de España, a midsize telecommunications company, has rejected the role of global consolidator as being too expensive. Instead, it has focused on building a strong regional presence in Latin America. Even if Telefónica has to sell its assets, or itself, its regional position will command a high price.
Keep Your Eye on the Ball. A big deal takes lots of time and consumes lots of managerial attention. If others in your industry are busy with their mega-deals, you can exploit that fact to improve your own competitive position. For instance, while pharmaceutical players such as Glaxo Wellcome and SmithKline Beecham have made headlines with their merger news, one large competitor, Merck, has so far refrained from making any such moves itself. According to industry observers, Merck intends to use this period in which its competitors are busy with postmerger integration to improve its position through aggressive marketing and other initiatives.
Make Friends. Another alternative to the mega-deal is to build scale through relationships. In many cases, partnerships are a more appropriate way to grow than M&A. Even a company as large as IBM uses alliances in its PC business, which has been deemed unprofitable but still important given its links with other IBM businesses. In 1996, IBM entered into a standing agreement to purchase low-priced PCs from Acer to resell under the IBM brand. In many cases, alliances are easier to bring about than acquisitions because they encounter less resistance within companies, from the government, and from other interested parties.
Appeal to the Referee. If your competitors' mega-deals may actually hurt you, and if you can't respond adequately on your own, you can put a spanner in the works by forcing regulators in your industry to institute antitrust proceedings. For example, among telecommunications companies, the nonconsolidators have bought some time by bringing in regulators to examine the legality of deals such as Bell Atlantic's acquisition of GTE and AT&T's acquisition of MediaOne. The current rash of international antitrust cases—such as those in Europe around MCI-WorldCom's purchase of Sprint and Vodafone's acquisition of Mannesmann—suggests this strategy may also be effective outside the United States.
Stalk Your Target. Even if it seems to make sense for your organization to pursue global consolidation, ask yourself if your industry offers significant first-mover advantages. If it doesn't, it may be smarter for you to let someone else go ahead and clear a path. Take the case of Tricon, the owner-franchiser of the KFC, Pizza Hut, and Taco Bell fast-food chains. Tricon's international strategy explicitly targets markets in which McDonald's has already established a significant presence, because that's an indicator of the potential for its own chains. Also, McDonald's has already shouldered some of the costs of establishing quick-service restaurant formats locally.
Sell Out. Even in cases where the big deal makes sense, it may be better for your company's shareholders if you're the seller rather than the buyer. America Online's proposed acquisition of Time Warner is a case in point. Time Warner's shareholders did well in the immediate aftermath of the announcement; many of them rushed to cash out. AOL's shareholders, by contrast, did not do as well. Some think AOL will eventually recover what it paid, but others believe this may be the deal that brings some rationality to the valuation of Internet stocks.
These are just some generic strategies, of course. Your viability as a nonconsolidator will depend directly on the analysis and imagination you bring to the table as you devise alternatives to buying up shops. In many cases, consolidation strategies are wrong. In an era that is witnessing technological discontinuities, managers must not focus so much on size as a goal but rather on the development of new business models that help them compete.
Excerpted from the article "The Dubious Logic of Global Megamergers" in the Harvard Business Review, July-August 2000.
Fariborz Ghadar is the William A. Schreyer Professor of Global Management, Policies, and Planning at Pennsylvania State University in University Park, where he is also director of the Center for Global Business Studies.