For every Fuji Xerox there’s a Sony Ericsson: the pros and pitfalls of merging your business

For every Fuji Xerox there’s a Sony Ericsson: the pros and pitfalls of merging your business

Published 24 February 2014 11:28, Updated 25 February 2014 09:31

Michael McQueen

Wedding bells are ringing. Business marriages seem to be in season. First there were the Microsoft-Nokia nuptials last year and now the blessed union of WhatsApp and Facebook. Even one-time retail rivals Myer and David Jones are flirting with the idea of engaging in consummation rather than competition.

In the face of disruptive business headwinds, such unions appear sensible – even necessary – for the survival of at least one of the parties. But, what are the dangers when two become one – and do the benefits outweigh them?

First, let’s look at when mergers and acquisitions do make good sense

Synergies of scale

In highly competitive marketplaces, consolidation of players is nothing new but still makes a lot of sense. The CBA’s purchase of Bankwest or the Westpac-St. George merger in years gone by may have done little to foster competition in the banking sector but certainly shored up the viability of all players involved.

Looking at synergies in a different sector, consider the acquisition of a range of South American beauty brands by direct-selling giant Tupperware since 2005. Having realised that consumers in South America spend 20 times more on beauty products than they do on storage containers, Tupperware leveraged its newly acquired brands superbly to the point where its beauty range now accounts for a quarter of the company’s total revenue. Better still, the new product range has provided a perfect cross-selling opportunity for the company’s more traditional Tupperware lines.

Neutralising a competitive threat

In a twist on the adage, a smart business strategy in the 21st century may well be, “If you can’t beat them, have them join you”. This appears to be the rationale behind the recent Facebook-WhatsApp acquisition and echoes Facebook’s $1 billion purchase of Instagram in April 2012.

In both cases, Facebook executives recognised that emerging social networks had the potential to significantly undermine the brand’s market dominance and opted to gobble up the competition rather than meet them head-on. Facebook’s rejected $3 billion bid for Snapchat in late 2013 indicates some of their appetite for acquisition.

Leveraging local brand strength

The third instance where business marriage makes good sense is when a global heavyweight seeks to leverage the brand strength or market penetration of an existing local player. Schneider Electric’s 2004 acquisition of Australian household name Clipsal was a brilliant example of this dynamic.

While pursuing acquisition as a business strategy for ongoing viability and relevance certainly has its benefits, there are some dangers companies and leaders must be aware of:

Misaligned cultures

Whenever two businesses with very different DNA merge, the blend can sometimes prove toxic. Consider the ill-fated acquisition of Australian beauty brand Nutrimetics by consumer goods giant Sara Lee in 1997. Although a number of factors contributed to the unhappy marriage, chief among them was the clash of cultures between a global American company and a family-owned Australian business.

Competency extrapolation

This term coined by Australian author John Dickson refers to the tendency amongst successful individuals to presume that simply because they are proficient at one thing, they will be equally successful in other unrelated endeavours. Such a dynamic occurs frequently in organisations when they grow outside their area of expertise and skill.

Consider, for instance, how competency extrapolation played a role in the fall of Kodak. In January 1988, Kodak took the disastrous step of acquiring Sterling Drug for $5.1 billion. Failing to recognise that producing chemically treated photo paper is vastly different from the manufacture of hormonal agents or cardiovascular drugs, Kodak took six years to acknowledge the venture was not a good fit – a mistake which cost them handsomely.

Bloated bureaucracy

The final danger in acquisition is structural. The absorbing of one business into another often leads to a blowout in organisational headcount, activity duplication and bureaucratic process. This can be devastating for the agility and responsiveness of the newly formed behemoth.

Consider for instance how Sony’s decade-long marriage with Swedish mobile phone brand Ericsson ended in disaster. Speaking of Sony’s woes, in April 2012, the company’s new CEO, Kazuo Hirai, identified that Sony’s number one problem was its lack of speed and agility in responding to marketplace events. His first order of business was to serve Ericsson with divorce papers and ruthlessly prune the bureaucracy and unnecessary processes which had bogged the business down.

While some business marriages work beautifully (consider Fuji Xerox which recently celebrated its 50th anniversary), many others have ended in messy breakups or unhappy unions.

In considering the benefits and pitfalls of growing through acquisition, perhaps the advice of the great empire-builder Augustus Caesar rings true: “Hasten slowly”.

Michael McQueen is a business commentator and four-time author. His most recent book “Winning the Battle for Relevance” is a look at why even the greatest businesses fail ... and how to avoid their fate. For more information, visit www.MichaelMcQueen.net

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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