Oligopoly Watch points to a Wall Street Journal article that looks at the current boom in corporate mergers and big eating small acquisitions; "Bosses Prefer Buying Businesses To Building Them", 2/17/2005). The author sees the following points about the current boom:
- Many big companies are flush with cash right now. Many have used that money to pay down debts, buy back stock, and increase dividends. The next logical place to put that money is into acquiring new companies.
- While the world economy is doing better than it was after the Internet bubble burst, the actual growth in capital spending is increasing at a modest speed, and that looks likely to be an upcoming trend. Therefore, expanding through internal growth is getting harder.
- Corporate heads are more optimistic than ever about mergers and acquisitions, in spite of the relatively high valuation of suitable targets. But the key is investors. In contrast to some of the thinking before, investors have been rewarding a number of skillful acquirers with high stock prices. Since execs get highly compensated (options, shares, incentives) when stock prices go up significantly, there's a good reason. (Of course, we often see executives get highly rewarded when stock prices go down, so that may not be the sole motivator.)
Whilst it's all good and well for the Big end of town to swallow up whatever and whoever they want, in the end it strangles many new ideas and innovation that generally only occur "down the other end of the street."
What tends to happen is that Big Slow Corp (who is too lazy (dumb?) to do something WoW itself) buys Fast Little Company in order to latch onto and eliminate what might become a threat to them; which they simply see- from afar- as being the systems, technology, people, reputations etc within the Little Co. they are eying off.
But they always forget that it was the company culture of Little Co that nursed and encouraged the innovation that allowed the Little Company to be so fast in the first place; enabling it to leverage its systems, technology and people. That culture (= the real, inimitable source of the competitive advantage) is inevitably killed off following the acquisition (Just ask Tony about trying to be innovative in a Big Company), because the Big Co isn't really interested in maintaining a culture of innovation, they just buy other peoples. So why do they need creative people? They don't, just Acquisition Managers.
But the potential threat to Big Co has been killed too; so they win anyway.
But if it works, then Big Co still wins:
"Exploiting a product that someone else has made by giving it the big company treatment in marketing, sales, and distribution is a lot less painful than finding ways to make serious and effective internal changes For all the talk of re-engineering the company, most companies would rather just buy another one. That move is high-concept, ego-gratifying, and relatively straightforward. Rethinking a corporation is complex, painstaking, and often tedious."