Mergers and Acqusition: the strategy of thriving

I have always considered and treat business as a living thing. It breaths, heaving up and down; it eats, consuming resources and energy; it craps, leaving a trail of social cost and waste; it grows, both in terms of size and age; it gets sick, throwing up employees as they get sacked; and it dies, either liquidated or consumed by a larger business. Business is also made up of people, organisms that works and operates in a system, not unlike us humans where we are a combination of organisms, organs and elements that operates in a systematic manner. Imagine if suddenly the system gets haywire (like your heart decides not to play its role and pump the blood), we would be in trouble indeed. So yeah, I see business as a living being.

And it is a living being that lives in competitive community, hostile most of the time. There are laws and regulations to help put order in place, but that is not necessarily the case all the time. It is a a dog eats dog world where the rule of the jungle applies, where the strongest and smartest (you would need to have both) survives.

As a living thing living in a hostile environment, a business or firm needs to do just that, be the fastest, biggest and smartest to stave of the sharks and other predators. In order to do that, the firm needs to evolve or grow bigger through whatever means possible.

Take the financial sector in Malaysia for example, after the financial crisis in 1998, the government realised that having many small banks leaves the domestic banking sectors and banks susceptible to the much larger foreign banks like Citibank, Stanchart and the likes. BNM then forced the banks to merge so that they could have a larger balance sheet and to compete even in the domestic market. The result is what we see now, with CIMB, Maybank, RHB possessing the size and might to take on mega deals which previously would have gone to foreign advisers. Maybank could swallow Felda Global Ventures listing and CIMB financed billions of ringgit worth of investments.

Their growth in size has also allowed them to not only stave of hostile competitors, but made themselves a predator, buying up banks in the region. CIMB has been acquiring banks in the region and so does Maybank. That had enabled the two banks to expand their reach and secure more business. They would not have been able to do what they are doing now if they had not taken that leap of exponential growth post the 1998 financial crisis.

But growing simply for the sake of growing is also wrong. It could lead to obesity, where the firm is not the biggest and fastest, but the fattest which makes a delicious meal to a hungry competitor.
There is a vast difference between biggest and fattest, especially in the business world. A bloated firm could get sick very fast and then susceptible to a target which could be much smaller than it is. This is the single most important principle that drove and caused the privatization of government 'businesses'. Take for example some utility business like the water business. It is a lucrative business, a cash cow, but it grew so fat that it became a target for private individual to take-over where the latter came with the promise of improved efficiency and profitability for all. Therefore, the business cannot simply just eat eat eat. It has to have a plan.

Mergers and Acquisition (M&A) is a part of business. It is one of the weapons within the arsenal of firm. But this weapon is not cheap and must be handled with extreme care. It could blow up in the face, backfired, as happened to many companies before. M&A is a resource and energy intensive exercise and if not careful, sap away all the resources of the firm even to carry on its normal course of business. M&A is an intoxication activity, it is sexy and could be sucking away attention of the top management away from the normal course of business. The worst is that the manager got sucked in so far inside that he or she would push for the completion of the M&A just for the sake of completing it, just because "we have come this far".  This cloud on judgement have killed many businesses so be careful. On this note, a fine example of a master practitioner in M&A not getting sucked into this is Tan Sri Khalid of Kumpulan Darul Ehsan Berhad in their quest to take over the water assets in Selangor. After years of negotiation the M&A, and despite all the effort and energy that they had put into it, he was willing to end negotiation when the M&A does not or no longer plays like how he wants it to be be. He killed it (but there is more to this here) and was willing to walk away, for now.

Therefore, there must be a system before you deploy the M&A 'bomb'. There are many cliches that people use to justify M&A, like "eat  or be eaten" or " bigger is better", "the best defense is an offense" or even "synergy", but without a proper business strategy system, methodology and process, an M&A could very well be set to self-destruct.

The following is the general process of implementing a business strategy that involves M&A.

We will continue this in our next posting. Please subscribe or 'follow' this blog so that you will be kept updated. This post is part of the M&A series which is linked to the Corporate Finance training conducted by Symphony Digest titled Applied Mergers and Acquisition. The details of this very affordable and useful training is provided below. Great hand-on and interactive session for business owners, mangers, corporate finance practitioners, journalists and you! Click on the link here to sign up - hurry, limited seats :-)