Stiglitz and Size

During my active academic years I often told my students that enlarging the size of a financial enterprise, is not a good idea.

Mergers and take-overs, MBO's and otherwise, upscaling the size of a financial giant ALWAYS (give or take a few percentage points) results in financial disaster. Reasons for the mergers, including acquisitions or take-overs (= M&A's) were newsed as being efficient, profitable or otherwise positive, while two years later management had to confess it did NOT work out as planned. The source of this is Stiglitz (http://jessescrossroadscafe.blogspot.com/2009/09/stiglitz-on-financial-crisis.html)

No surprise.

Normally ANY (M or A) buy-in is NOT profitable. More than 70% of any M&A activity fails to produce what their godfathers predicted it would result into. 70%, yes indeed, a sizeable amount, implying that most M&A's are delivering S H I T for the buying party and deliver G O L D for the selling party.

So why is this M&A thing so popular. The answer is as simple as it is dangerous: It is consultants! Consultants drive managements mad (which demonstrates the incompetence of management).

These (consulting) people stress the need for change on a quantative scale: big(ger) is (more) beautiful... meaning management acquires more prestige, the company gets a higher mark in the Fortune top 500, you get more noticed in the financial (duhhhh) press, and so forth.

SURE...?

In reality the combined lean, mean sex machine of a merged company gets burdened more and more with bureaucratic overhead, shows no more swift and time-related management actions, quadruples its consulting fees and loses money every day of its existence. How nice indeed....

Let me take you back a bit... (theory wise)

Perfect competion, as we were told while we were students, is theory's bliss. If every company would have an insignificant contribution to total 'production' of goods and/or services they ALL benefit. If parties collude or cartellize this benefit is jeopardized. Meaning: no good.

So, all parties within any industry would be better off on their own. Simple message, simple answer, simple solution. So what did companies decide?:

GROWTH

especially external growth (= M&A's ).

Illogical, of course, but all the more any day's reality.

Theory against practice. Theory says: stay as you are, grow INTERNALLY where you can and where your strengths show. Practice (apparently) says: grow where you can EXTERNALLY , eliminating competition where you can in order to be the 'big player' in the field you entered....

Empirical evidence shows that M&A activities lead to losses and bad results.

ANYWHERE.

So, also in the financial community (as in the rural, production and any other form of activity oriented business).....

D O N O T M E R G E,

I beg you.

EXTERNAL growth is inferior to INTERNAL growth...

R E M E M B ER TH A T...