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Conflicting motives, strategies and outcomes in merger and acquisition activity

20 February 2015

The article at a glance

By Peter Williamson, Honorary Professor of International Management at Cambridge Judge Business School Creating oligopolies? Reducing in healthy competition? Up go the …

Business teamwork - puzzle piecesBy Peter Williamson, Honorary Professor of International Management at Cambridge Judge Business School

Professor Peter Williamson
Professor Peter Williamson

Creating oligopolies? Reducing in healthy competition? Up go the prices and fees; down goes the service and/or product quality. Customers are put in a stranglehold. There is the inevitability of redundancy and its consequences.

Or perhaps it is the opposite – we need bigger and better. Only the major, complex entities can be geared up and scaled for the modern world. It is simply natural to grow in a competitive fight of the fittest.

The pro- and anti-merger arguments, particularly in the financial sector have been well rehearsed, especially over the past few years. They remain central, at least for some, in the discussion as to how these providers can clean up their acts and still remain profitable. Many will recall nostalgically their sentiments for the Midland Bank of yesteryear, for example, and wonder what part its takeover by and integration into HSBC has played in putting it under recent scrutiny. But HSBC is not on its own as continued mergers, acquisitions and demergers cause a spotlight to be put on the whys and wherefores of the game. The past several years have demonstrated what appears to be every conceivable action and reaction, every possible negative outcome and misguided tactic and strategy, as the sector stumbles towards its seemingly inevitable next disaster. Takeovers that have been flawed in their strategic purposes, poorly managed reorganisations and downsizing, and the involvement of government, have all become familiar and depressing stories.

I believe leaders need to take special care in M&A activity to avoid megalomania that turns into a love affair with scale and size. In my 2012 article with my colleague Dominic Houlder, “The professional challenge” (Business Strategy Review, 23(4): 50-55), we explored the potential conflict that can arise, particularly (although not exclusively) in professional services firms (PSFs) as they balance growth, globalisation and industrialisation strategies with the imperatives of collegiality and concern for customers’ best interests that should remain at their core. While recognising the need and desire for growth, we encouraged the leaders of PSFs to address a crucial question: How can PSFs be re-invented to ensure that these traditional characteristics that define professionalism are able to withstand the strains of industrialisation, management by process and the crude requirement for more sales revenue? I anticipate risks in seeking to mix a service ethic with an industrial and commercial one and that sometimes the two are in direct conflict. These questions should be of critical concern in PSF M&A transactions.

On the more positive note, acquisitions which, for example, bring skills, technology and services that would otherwise be delivered less efficiently and effectively, or need to be outsourcing to achieve these outcomes, are more likely to make sense. M&A may allow the nimble to build scale in attractive segments of the market and benefit from lower cost bases. But they need to guard against their revenues being whittled away by niche specialists who focus on low-volume, yet highly profitable services geared to specific customer needs benefit from new services that emerge from the innovative and entrepreneurial cultures and capabilities they engender. It is probably easier for such businesses to anticipate and respond to changing market requirements. Opportunities emerge when the market leaders have not been sufficiently and consistently innovative or mindful of maintaining customer care, thereby fail to defend their future positions and remain in the forefront of change. Some might think that it would be better to have a relatively small number of world-class, all-service behemoths that can match the needs of international corporates with similar size and spread. But this could open the gates to innovators, specialists and national champions to flourish: witness the emergence of the new banking models that are challengers in the UK market, such as Metro Bank and Handelsbanken.

I take the view that the real problem with M&A in financial services is that it can lead to companies becoming too big and too industrial so that they become simply sellers of products and services and create mis-selling cultures as a result. In a bonus-driven environment that needs to justify the premiums paid for acquisitions, it becomes more difficult for staff to empathise with customers and for most customers to be assured of personalised and duty-of-care based service.

It is perhaps ironic that investment banks are advising that M&A is the route to strength when some financial institutions such as Lloyds and TSB have been forced to de-merge. Here I would offer a few warnings. I believe that the function of financial advisors is to give guidance on the shorter-term tactics of doing a deal, on pricing and on how markets will react. They cannot substitute for strategic thinking; it is for senior management to assess and explain how and why an M&A deal is going to strengthen their company in the longer-term. The challenges faced by Lloyds and RBS over the past few years arise to a significant degree from the failure to manage strategic direction, financial compliance, capital adequacy and responsible governance. Yet as TSB seeks to become, in its own words, “different from other banks”, it will be interesting to see how whether it can deliver set of truly differentiated services and overcome the customers’ disinclination to shift from one bank to another. The Co-operative Bank of recent times may suggest the possibility of a gap between rhetoric and delivery.

In sum, I would suggest that critical elements for successful merger and acquisition initiatives are to avoid the lust for sheer size and scale and the view that it is “all about the money”. Leadership requires engaging people and balancing the, often conflicting, needs of shareholders, employees past, present and future, customers, business partners, suppliers and the expectations of society in general. It must never be forgotten that the success of M&A depends on creating value for all these stakeholders without losing the customer base and damaging the brands in the process. Competitors will be on the lookout to identify and exploit any miss-steps along the way for their own benefit.