The path up the curve starts with the Opening Stage where industries begin and companies proliferate. In the Scale Stage companies acquire other companies as they realize that organic growth will not push them to success. As industries move into the Focus Stage, mega-mergers become the norm. The industry consolidates and smaller companies disappear or are acquired. In the final Balance and Alliance Stage, companies must find a way to reinvent themselves or die.
Mergers and acquisitions activity has increased significantly over the last few decades, but it is a messy landscape strewn with successful conglomerates alongside contentious cultures and unrealized synergies. There are lessons to be learned for managers and investors seeking success in the marketplace, and the authors of Winning the Merger Endgame, executives from A.T. Kearney, have tracked a natural history of mergers and acquisitions.
They studied 1,345 mergers of publicly traded companies that occurred from 1990 to 2000. To ensure a global context, all the mergers had transaction values greater than US$ 500 million. They combined the information they gathered with information from A.T. Kearney's own Value-Building Growth database companies that can maintain a specific balance between growth and profit to achieve long-term added shareholder value. They discovered certain business patterns emerged over time. By plotting major industries based on degree and speed of concentration, they built an S-curve along which every industry moves over an average of 25 years each. The authors found that mergers determine profitability, market share, and stock prices. Far from being a sideshow in business, they are the main event, "the Endgame."
Here are five maxims of Endgames:
- All industries consolidate and follow a similar course. Merger competence is the core competence of winners.
- Merger actions and consolidation trends are predictable. Industry consolidations will correlate nearly 80 percent with the rise in global stock markets.
- The Endgames curve is a tool to strengthen consolidation strategies and facilitate merger integration. All companies must keep the curve in mind from the beginning because all industries continue riding to the top no matter what.
- Every major strategic and operational move should be evaluated with regard to its Endgames impact. The value of a merger lies in the increased competitiveness of the combined entity, the resulting increase in shareholder value, and the move up the curve.
- Endgames position offers a guide for portfolio optimization. Companies should optimize their portfolio of subsidiaries and business units across different Endgames stages.
More important than the clear and logical order to the process of industry consolidation is that it can be a predictive tool. These fundamental truths set the foundation for an in-depth look at the individual stages.
Here are five fundamental Endgame truths:
- Consolidation is inevitable, unavoidable, and inescapable.
- All industries are global.
- Revenue is stable, but profitability changes in accordance with the stage.
- Long-term success depends on riding up the Endgames curve.
- The future belongs to the maestros of external growth.
The Opening Stage is the frontier of industry consolidation. At the beginning of the stage, there are very few companies and even fewer with substantial revenue. Entry barriers are low, so no single company owns a measurable percentage of market share.
Having laid claim to as much territory as they can, it is time for companies to build scale. They must devise new strategies to grow, capture market share, and protect their turf so they can continue their climb up the Endgames curve. Increases in scale improve production, spread fixed costs, and earn profits though the profits remain slim due to competitive pricing.
Companies must grow, but being careful not take on more than they can handle, lest they become strained for working capital. Another danger is that excessive borrowing costs can become onerous if the acquisitions are not as valuable as hoped.
In the Focus Stage the strategic emphasis changes from speed to finesse. This stage is characterized by mega-deals and large-scale consolidation plays with the goal of emerging as one of the small number of global industry powerhouses. Now future Endgames winners acquire competitors with an eye toward economic return rather than market share. After integrating mega-mergers made in late Stage 2 and early Stage 3, companies turn their attention to maximizing shareholder value and satisfying equity markets. The rules of the game have been established and the most important competitive levers that come into play are economies of scale, size and global reach, and cost position.
The heavy-hitters are at the top of the Endgames Curve in the Balance and Alliance Stage. Depending on how they protect their positions, they can be successful in this stage for a long time. Big mergers are no longer an option, so companies spend time maximizing cash flow, protecting market position, and reacting and adapting to changes in the industry, including market penetration and governmental scrutiny.
One of the biggest challenges for Stage 4 companies is how to spend the cash they generate. They can return profits to shareholders, break into pieces and redefine their market scope, or diversify into new or industries and new Endgames paths. The one option a Stage 4 company does not want to take is to maintain a business -as-usual mindset. This will lead to disaster in the face of breakthrough technologies from competitors and completely new industries.
CEOs and boards of directors must realize and accept the inevitability of the Endgames consolidation. Once they understand that every company in every industry will go through the four stages or disappear, they need to develop a vision to move through the stages. Copyright © 2003 Soundview Executive Book Summaries