Get Rich Quick!

Now that we have your attention…

Shareholder Value

Businesses are measured by  their success in maintaining and increasing shareholder investment and commitment and remember shareholders are really only looking for one thing, a financial return on their investment. Businesses therefore have to be able to generate ‘shareholder value’. Watching the TV programme ‘Dragons Den‘, it’s surprising just how many ‘would be’ entrepreneurs seem to overlook this basic fact. After all those investors in the Den didn’t get to be investors by supporting businesses for benevolent reasons, so guess what, those entrepreneurs that don’t ‘get it’ don’t get to be entrepreneurs for long.

The drive to generate a return on investment is paramount in all businesses. Furthermore a business that generates a massive return cannot possibly sustain it long term. The rule is, the greater the rate of return the more unlikely it is to be sustainable long term.

Long Term Sustainable Growth

Business success then is essentially about ‘long term sustainable growth’. Where ‘long term’ is multiple years, this is where the 5 year plan comes in. These plans are pitched at a period of 5 years for a reason, any longer wouldn’t be realistic or credible, given external uncertainties, and any shorter would result in unstable actions or ‘short-termism’. 5 years is a sensible compromise on the period to plan around.

Aside from the period there is the growth target itself. Growth targets should be set ensuring they are sensible but challenging.  Targets should be flexed to make them challenging according to the prevailing market conditions. Shareholders demanding high returns in a flat economy may cause a business to make poor decisions that may ultimately bring about its downfall.

Mergers & Acquisitions

Mergers & Acquitions

Where does that leave businesses in the current global economic conditions where markets are generally flat? Often the route chosen is Mergers & Acquisitions (M&A). It’s as easy as 1,2,3…

  1. Identify a target company
  2. Negotiate a price for their expertise, their R&D projects, their market share
  3. Cut costs from the combined business through rationalisation of functions, facilities and people and use these synergy savings to offset against the acquisition costs.

The problem with M&A in the current economic environment is that the ‘other’ company is operating in the same overall business world so it will have similar growth issues albeit in another market. Futhermore any synergy saving can only be made once, so for the M&A to be successful we shouldn’t place too much emphasis on operational synergies, we need to think about how the combination of the companies actually creates value, something greater than the sum of the parts!

Greater Than the Sum of the Parts

How is this possible?

  • Scale: the combined company creates a business entity that can compete in markets and with customers where there is effectively a minimum scale
  • Complementary Product/Service: the combined company allows insourcing of a product or services to give a better end-to-end offering
  • Coherent Market Presence: the combined company’s market presence creates a more complete picture, displacing smaller competitors and healing over hitherto gaps in the market

Branding the Combined Business

The M&A target has a certain market share, reputation etc associated with its ‘brand’. Some businesses actually value their brand on the balance sheet, it has a tangible value. In the M&A scenario we are creating one cohesive business so we can’t have 2 brands. We can chose the purchasing company brand but that might dilute the new business overnight. The key thing here is to recognise that there is another factor in the equation, the market and its understanding of the M&A you’ve made. We need to communicate the M&A to the market and shareholders but we also need to engineer the branding to maximise the market position of the combined entity. Co-branding is an option, at least during transition but long term one of the brands must disappear and along with it, some value, no matter how intangible it is.

5 Points to Consider

So for growth in today’s stagnant markets consider:

  • Viable returns for your shareholders
  • Long Term Strategy (5 years)
  • Growth targets consistent with market conditions
  • M&A for scale, better products and more coherent market presence
  • The markets and branding the combined business, “don’t throw the baby out with the bath water”

See also my previous post, Growth in a Stagnant Market for a discussion around the dimensions of Ansoff’s Matrix.

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