Merging matters

While large-scale integration activities tend to result in merger failures, the same cannot be said for limited integration activities, especially of non-core or service activities.

A common theme which you see in many successful consolidation and roll-up strategies is to leave the operations activities in the acquired business to be managed by local management while service functions such as personnel, public relations, investor relations and other head office service functions are consolidated. This leads to some economies of scale while still retaining the integrity of the major operations.

Too often acquisition activities are approached with an objective of ‘one size fits all’ and ‘lets all be one big family’ without appreciating the costs and risks of pushing and pulling everything together for often dubious benefits.

Few companies have experience at large scale integration and even fewer have managed to do it successfully. Not only does one have to cope with physical integration of premises, information systems, products and operations but one also has to sort out how to accommodate two sets of employees with different cultures. Then, of course, one has to wonder if the merger benefits were in any way realistic from the outset or whether they were someone’s fantasy of what they would like to happen rather than what is the most probable outcome.

Those acquirers who set out to build scale by buying stand-alone operations, usually in the same industry, who recognise the benefits of keeping the operations well contained and focused, tend to achieve better acquisition results. However, they do tend to centralise common service functions where economies of scale and specialisation has corporate benefits. Often smaller companies cannot justify the services of specialists and usually outsource those function.

A larger entity can bring these in-house and provide a better outcome by having the personnel focus wholly on the activities of the corporation. Some benefits can also accrue to all group companies through centralised procurement or group preferred purchasing agreements.

Even though decentralised group structures may give up some scale benefits by leaving operations loosely coupled, they often have the benefit of lower risk and greater resilience. Smaller business units tend to be more responsive to market changes and can purchase more specialised systems and equipment to suit their limited market.

Another advantage of loose coupling of business units is that it allows the group to buy and sell business units more easily. Uncoupling an integrated activity is highly problematic and confronts both buyer and seller with higher risks.

While cultural differences are most often the cause of merger failures, it is interesting to note that most central service functions often have more in common with each other across companies than they do with other parts of their own business unit. Thus most PR activities tend to recruit similar people and work in similar ways. The same could be said about legal services, shareholder relations, treasury and other head office services. Thus combining these functions is often far less problematic from a personnel viewpoint than combining operating units.

Hesitation to merge should be the fundamental rule in acquisitions. Unless there is a compelling case to integrate activities, they should be left alone. That is not to say they should not be improved with better management, systems and processes, but pushing business units together should be resisted unless there are significant and readily achievable benefits.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.