UPDATE: Making Mergers a Growth Strategy
Go Beyond Resource-Based Thinking to Create Real Value
In this current global downturn, M&A activity has become quite robust: The number of companies with cash to swoop in and acquire businesses at fire sale prices has eclipsed such activity in the past.
In the 2003 article, entitled Making Mergers a Growth Strategy, I wrote how the decline in the U.S. economy at that time had slowed the pace of mergers and acquisitions and that activity was poised to pick back up. Fast forward almost a decade later and the economic crises that began in 2008 has slowed the economy in ways only imagined by those who lived through the Great Depression.
However, in this current global downturn, M&A activity has become quite robust: The number of companies with cash to swoop in and acquire businesses at fire sale prices has eclipsed such activity in the past.
But because of the dire environment this time around, many mergers and acquisitions have also adopted a different tenor in terms of why they are occurring. The days of making acquisitions based on the consolidation of key resources, financial and physical assets, brand names, or human capital have given way to more of a “garage sale” mentality to pick up whatever pieces of struggling companies that could represent a bargain to potential future growth for those able to buy such assets once the economy more fully recovers.
For many firms this is an ideal scenario in terms of being able to get a really good deal on synergistic assets. However, it also means that integration strategies have been dramatically trimmed down either because there isn’t much to integrate beyond the legal fine points or there isn’t the will to spend the financial resources that a solid integration strategy requires. It is likely to be a combination of the two.
So, what does this mean for the Root Strategic Assets in these transactions? Those less tangible, messy to measure, and difficult to implement components of Collaborative Leadership, Cultural Cohesion, and Committed Management are likely being ignored…for the time being.
At first glance, this might seem like a rather pessimistic viewpoint, so it would be helpful to look beyond the horizon to what is coming next. Once the smoke clears and the global economy begins to emerge from the extended recession, the wholesale purchase of low hanging business fruit will also end, leaving leaner, more financially conservative enterprises. In fact, this is a trend that is already firmly in place. Companies will continue to look to Mergers and Acquisitions as a way to leverage synergies, but they are also going to be much more likely to be looking to Root Strategic Assets because that is where real differentiating value will reside in potential acquisitions.
About the Author(s)
Kent Rhodes, EdD, serves as a participating faculty member at Pepperdine in the area of Organizational Behavior, Theory and Leadership. He is an entrepreneur who maintains a successful coaching and consulting practice for a variety of privately held and family-owned enterprises. Rhodes founded OnCourse Network, Inc., an Internet education company, and served as chief executive of the company. He successfully negotiated the sale of the company to a Silicon Valley publicly traded corporation and subsequently served as a principal with that company in San Jose, California until he successfully completed its acquisition and integration growth strategies in 2001, when he joined the Pepperdine faculty as visiting professor.