Growth through acquisition? Wrong!
I have never believed in growth through acquisition. It has been the norm for as long as I have been paying attention to business. When a company is not doing well in an area, they go and buy a company that is. This fails in a couple ways. First, it is almost inevitable that the company making the purchase will eventual push their culture and business practices on to the acquired business. This serves only to send the once thriving business, down the same path as the failed path of the parent company. Next it fails in a more long term way in that there is a reduction in competition. We all know competition breeds innovation. A 3rd way is that a large company cannot move with the changes in economy and markets. That is a topic all to itself and something I covered in one of my earlier posts. “Big ball, small ball”.
I believe that companies should first ask themselves “how big do we really need to grow?” Growth to what end? Is growth required mainly to appease stock holders? That is a never ending battle that cannot be won. Stock holders will always want more money and most don’t care how is obtained. They merely want portfolio growth. IMO that is not how to do business. That forks me off to another topic that I will address another time. We should not have a public stock market. Stocks should all be privately sold and our retirement should not be based on the growth of stock based 401k. Another rant, another time.
Let’s compare acquisition growth in a restaurant scenario. A restaurant, I’ll call is “Big Al’s”, is not doing well. Losing customers to a small restaurant, “Little Joe’s”, down the road that is offering great food at a great price. The customers leave Little Joe’s very satisfied and come back for more as often as they can. Big Al is wishing is wishing that he had that kind of business. The problem is that people that tried Al’s didn’t have such a great experience. The food wasn’t very good and the price was too high. (After all Al has to make enough money to keep his investors happy. They have boats and houses to buy). Al cuts back a bit more to increase his profit margin. He hires inexperience wait staff and cooks. He buys the cheaper cuts of meat and buys mass produced vegetables. People decide to look for something better. They find Little Joe’s. Little Joe’s has no stock holders so he makes only enough profit for him and his family. The extra money goes into the best wait staff and the best food he can find. People see this and go back for more and more.
What could happen next is all too to typical. Big Al tells the stockholders that they need to buy Little Joes. They need to eliminate the competition and increase Big Al’s corporate bottom line by leveraging the profits made at Little Joe’s. They sell more stocks and buy Little Joe’s. Now the real mistake happens. Big Al tells the remaining staff at Little Joe’s (now a division of Big Al’s) that they need to change the business to match that of Big Al’s. Cut back on the food quality and service. Then they see how much Joe was paying his staff and they makes changes to get them inline with Big Al’s employees. The customers see this happening and begin searching for a new place like Little Joe’s “used’” to be like. Little Joe’s is no longer profitable and the stock holders are not happy. The circle is complete and Big Al starts all over again looking for another small restaurant to acquire in order to help appease his stockholder’s desire for more MONEY.
The way the scenario should be played out IMO is simple. So simple I am surprised it is so often over looked. Big Al’s should not give Little Joe’s a second thought. Big Al should find ways of keeping his customers happy. Get the best food, the best service and NO public investors to appease. They will come back time and time again and they will bring friends. THERE is your growth!
