In "Mergers and Acquisitions' Losing Hand", an article published in Business Finance Mag by Anand Sanwal at Brilliont (http://businessfinancemag.com/article/mas-losing-hand-1118), Anand makes the argument that, based on his firm's research, the 33 largest mergers and acquisitions between 2002 and 2007 returned, on average, negative value and increased the combined entity's volatility.
"In what was arguably one of the greatest bull markets we've ever seen, we observed that megadeals actually destroyed value over 60 percent of the time. On average, transactions resulted in negative cumulative excess beta returns (--4.03 percent) in the year after their announcement."
I wonder if this finding also applies to smaller deals. A year ago, I was researching success stories in municipal Wi-Fi for a client. (That's one difficult place to find success stories!) I noticed a trend. I would find little companies that won awards (sometimes national awards) providing superlative Wi-Fi service in their region. Then, these companies would disappear off the radar screen. A lot more research later, I would reconstruct a little fish/big fish story where these successful small companies would have been bought by a bigger and bigger player, until finally, the large parent company would go belly up. All this value, destroyed. Essential communication services in isolated regions, shut down. All because of some quixotic model of growth and corporate success.
Schumpeter's Small is Beautiful notwhithstanding, I think an unquestioned assumption in business thinking has always been 'bigger is better'. Bigger means you're too big to fail (these days). Bigger means more access to credit, more power to crush your competition, more leverage with suppliers and distributors, etc. But are there countervailing forces? Bigger means too big to manage efficiently. Bigger means your managers don't feel personally responsible for their business unit's performance, because of corporate overhead's damper effect. Bigger means nobody at the top has a personal sense of your clients at the bottom.
When the CEO of a small municipal Wi-Fi has personally signed on a client, he will probably do everything in his power to keep that client happy. When the CEO of a large corporation needs to cut costs, he might slash the equipment budget of as small municipal Wi-Fi business unit. he has no idea that this means the unit will not be able to service clients competitively a year from now and will therefore progressively lose its customer base. At the same time, the business unit head might not want to fight for that investment, hoping that if he meets his quarterly numbers, he'll have been promoted to something else before the impact of the lack of investment is felt. Etc. Nobody owns the end user anymore, so paying customers end up leaving. That's just my hypothesis of a possible scenario to explain why once thriving businesses end up dying when acquired by large corporations.
It would be interesting to explore whether 'The rule of 150' that Malcolm Gladwell describes in The Tipping Point is one of the factors that helps explain the loss in effectiveness when small businesses are acquired by large corporations. Gladwell quotes Robin Dunbar, a British anthropologist, saying below 150 people is the size at which "orders can be implemented and unruly behavior controlled on the basis of personal loyalties and direct man-to-man contacts. With larger groups, this becomes impossible." (Little, Brown, 2000, p.180) It turns out the military historically keeps its units below 200 people, Hutterites (a religious sect) start new groups whenever one of their groups reaches 150 people, and Gore Associates, the makers of Gore-Tex, start a new group every time they reach 150 people. These small groups keep Gore Associates profitable and innovative because the peer pressure to create good corporate earnings is "much more powerful than the concept of a boss". (p. 186) Small groups also enable members to know each others' strengths & weaknesses, interests and distates, thus knowing who to call on. (p. 190) This intimacy, shared purpose, transparency of action and effect, and shared responsibility are all lost when a company gets too big.
I think business school professors should be scrutinizing the issue of value creation in M&As, and the costs and benefits of bigness.
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