Shareholder Value and Morpheus’ Choice

Business Performance in the Economic Downturn

The most basic principle of the capitalist world requires businesses to generate a return on the investment for shareholders. Since the Global Financial Crisis (GFC) of 2008 this has been problematic for many businesses. It has taken some time to really impact, longer in some sectors than others, but the result is that the customer base in general has had to constrain spending and investment, plans have had to be made less ambitious, delayed or cancelled completely.

This results in an interesting dynamic; customers have constrained budgets resulting in businesses all the way up the supply chain having flat or declining revenues however to sustain their own shareholder investment and ultimate survival they need to continue to offer an attractive return on investment.

Red Pill or Blue Pill – Morpheus’ Choice

There are really only two strategy options for growth, like binary alternative offered by Morpheus in the 1999 film “The Matrix”:

Red Pill or Blue Pill

“This is your last chance. After this, there is no turning back. You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes”.

  1. BLUE PILL – Organic growth, investing more in product or service development and doing something to differentiate to gain market share. See the “Importance of Unique
  2. RED PILL – Mergers & Acquisitions, buying another company to enter new markets and save on the cost base through rationalisation

In the current constrained economic context the BLUE PILL is perhaps hard to swallow, there are things that can and should be done as BAU to ensure market share has positive growth pressure through driving product and service innovation but its a long haul and with customer confidence at an all time low it really feels like the “waiting game”/”no action” alternative. You really do “wake up in your bed” and just carry on.

The RED PILL however feels way more attractive and action oriented, to the business strategists it offers a route into new markets hitherto untapped. To the marketeers it offers improved brand value and competitor positioning. To the financiers it offers increased financial performance, add the revenues together and rationalise the cost base, the bottom line looks great on paper even offsetting the one off acquisition and rationalisation costs. It offers a seed change, reorganisation, the challenges of PMI, new opportunities. Where do I sign…? Of course its never that simple but the fact is this is “action”.

The macro consequence of M&A is variety reduction of suppliers in a given market, less competition and less choice for the customer, if taken to the extreme this means less new, innovative products and services and a general move to a more monochromatic market. Fewer competitors leads to complacency in terms of innovation and certainly there is reduced need to be price competitive.

So should I take the RED PILL in the context of the downturn?

It certainly is the action oriented option, the one that throws the biggest rock in the pond, it will create a lot of waves and ripples and change is exactly what is needed in a stagnant situation. The short answer is yes, take the RED PILL and “see how deep the rabbit hole goes”!

Ensuring Success

The best we can do is maximise the probability of a successful M&A. So what do you need? Like so many things in life, it distills down to 3 essentials:

  1. You need to really understand your position in the market and those of your competitors and acquisition targets (Know where you are and where you are going – Plan)
  2. You need to have the ability to act in a fluid and agile fashion, an organisation that is overly bureaucratic will not make the best acquisitions, others will get there first (Have the ability to move quickly – Act)
  3. You need to have organisational design and alignment central to your business to get the best benefits from any PMI, don’t be afraid to get external assistance in this area. (Have the processes and people to deliver – Execute)

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