Merger mania strikes again. Will it play out differently this time?
Just when you thought it was safe, along comes déjà vu all over again!
In so many ways, our industry looks much different as we embark on the second decade of the “new millennium” than it did in the last decade of the past one. Fewer companies are competing, and there is a very different global geographic distribution. Quality and on-time delivery – every company’s means for dramatic improvement a decade ago – are no longer differentiators, as everyone has dramatically improved and performs equally. Technology itself has marched along so quickly that what was “cutting-edge” a decade ago would be considered “commodity” today. But in one way the 1990s are alive and well: Merger mania has once again struck industry boardrooms.
For those who may not remember (or who wisely forgot!), in the mid 1990s a buyout group began a rollup of smaller (albeit what in today’s world would be considered large) companies into what is now Viasystems. On the heels of this business model, and with the encouragement of some of the then-brightest Wall Street analysts who covered our industry, others followed suit. Remember Hadco and Praegitzer? They were caught up in the mania, as was DDI, Altron, Continental Circuits (the Phoenix version), Coretec and a host of much smaller and all-but-forgotten companies.
Like many, I have fond memories of the halcyon ’90s. And I’m not necessarily against mergers; in fact, if someone came along with a boatload of money, I too might sell in the proverbial New York minute. But looking at the carnage, and considering the cost vs. value of those transactions, I have to ask, “What are you guys thinking?!”
If the mantra of the ’90s was quality and on-time delivery, the mantra of the new millennium has been “value,” and it takes some stretch to understand how most mergers create value. Early in my corporate career, I was responsible for “business planning,” which included mergers and acquisitions. Being with a Fortune 100 corporation, we sold a lot of businesses that no longer fit with our ever-changing corporate “vision” of businesses – usually selling poorly managed or neglected facilities.
We never seemed to do well buying other companies either. Too often after closing a deal, we would soon find that the culture, capability and claimed strengths of what we had just bought weren’t quite as advertised. More than a few acquired facilities quickly made their way to the list of poorly managed or neglected facilities that were sold! The exceptions were the few cases where the acquired facility filled a specific niche, or where we could shut down the facility and assimilate the business into an existing, better-managed facility. My take from a few years buying and selling was that, once all the dust settled from the deal, rarely was any value gained.
Looking back at the volumes of merger activity, I believe the same was true: little or no real value resulted from all the deals. Surely most companies actively in the hunt for deals are no longer in business. More telling, the capacity footprint is a shadow of its former self, both for the companies involved in those mergers and the industry as a whole.
What is different this time? Instead of the heady, egocentric hype of last decade, this round has been lower key, keeping with the economic mood of the times. In some ways today’s transactions appear more like a hybrid of Jack the Ripper meets Pac Man. But the results appear headed to the same conclusion, which is to say that little, if any real value will result from the (sizable) investments made.
This brings me back to the déjà vu aspect of today’s merger environment. Several of the megadeals have involved the same companies who lost so much the last time they forayed into the M&A world. You would think they would have learned that as attractive as an acquisition may appear, the end-results don’t always warrant the time, talent and treasure initially invested and subsequently required. More to the point, in an industry that has a voracious appetite for investment in technology and the capital equipment to produce it, maybe money can and should be better spent building the competence of a company’s technology franchise in order to build value.
Customers are searching for technology solutions – answers – for the next generation of product. Building value requires being able to invest in and develop technology. Equally, as the equipment used by many in our industry is getting long in the tooth, investing in more, older equipment and infrastructure via an acquisition heightens the risk.
Some may say that merging large companies will increase value by consolidating excess capacity or reducing the unsustainable “desperation” pricing that sometimes results when weaker companies make last-ditch efforts to fill plants. However, if those involved are that weak, they eventually will founder, and the same result achieved with no investment required.
I do hope this time around, these mergers have a happier ending. In each case, hopefully the acquiring company really needs additional capacity and capability, and the corporate culture fits with their needs and actually increases value for all.
But we should keep in mind the companies that survived previous downturns were, and are, ones that regardless of size or location have remained focused on building value by satisfying customer needs. And customers need technology development and solutions for tomorrow’s products. The greatest single value-adding strategy any company can follow is to stick to its knitting and invest in developing the technology and capability to service customers and their markets. PCD&F