Thursday, October 21, 2010

Mergers and Acquisitions – A Means to Engineer Short Term Growth and Earnings

In last few years, we have seen a slew of mergers and acquisitions in corporate American landscape. Among others, one the main reason for such M&A is growing the parent company under the notion that it will get complementary set of product portfolio or customer base. This all sounds good in theory, but in practice it has wide connotations. In practice, very few merger or acquisitions work out in long term. There are umpteen examples that, holistically, M&As, serve no purpose other than increase fat bonus packages of c-suite executives.

In these M&A driven growths, in almost all cases, the synergies are achieved by cutting jobs, consolidations, killing few products, etc. In two or three years, c-suite executives take hefty bonuses and leave the company behind with all the debt loads or waste of shareholder money.

Consider the example of HP in last few years. HP has spent $31billion to acquire about 35 companies in last 5 years. What is the outcome? These acquisitions have grown company in revenue and earnings. Cut cost by synergies and consolidations, in the process laying off 25000+ people. I wonder with $31 billion, couldn't HP develop new products on its own? But then how will management get their bonus? The guy who is running the show is not going to be there for long! Short term thinking? Spending $31 billion in development and growing future business could have employed 25000+ or more people. Boost to US economy. Boost to its real competitive edge. HP research funding has gone down from 7% of revenue to close to 3% now. HP recent announcement says, 2010 earnings will grow by 14% (excluding one-time cost of recent acquisitions). Acquisitions have become part of HP's operations now. So why exclude? It was not free. Not just HP, almost all companies are on this path.

Microsoft is estimated to have spent more than $15 in last few years on acquisitions. Intel recently spent $10 billion dollars some of which went to acquire business which it exited earlier! Pfizer is another example where it has failed to come up with any new drug in last 10 years. Instead Pfizer management is happy spending time and effort in acquisition binge.
That's the story of 21st century big corporations in US. Money keeps getting wasted and not invested in future business building. Very few companies are focusing on building businesses. All of this driven by managers whose background is in law/accounting/management. They really do not know how to build businesses!

On the other hand, 1950s to mid-1990s, US corporations used to spend large amounts in R&D, developing products, new markets, new applications, etc... on which these corporations are built.

The entrepreneurial culture has given way for wall street’s investing banking culture.


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