The year 2006 set a record for mergers and acquisitions worldwide. Deals totalled $3.79 trillion (about Rs167.4 lakh crore), 38% higher than in 2005, and 55 of the transactions were valued at more than $10 billion each, according to data from Thomson Financial.
Europe was one of the big players, registering 39% more deals than in 2005 for a total of $1.43 trillion. The US came in at $1.56 trillion, 36% higher than the year before.
Private-equity firms were major movers in this trend, responsible for 20% of global merger and acquisition (M&A) activity and 27% of activity in the US, according to Thomson. “So far, the role of private equity] is clearly gaining momentum,” says management professor Harbir Singh, an expert on corporate acquisitions and restructuring. “Private-equity players are more significant today because they are agents for getting better productivity from assets… And, they are willing to make tougher decisions than pre-existing management teams can make.”
However, Singh notes that there may be “an excessive momentum” with respect to private-equity players: “As valuations in the market start rising, it will be harder for private-equity players to actually have the margin beyond their premium paid to recover value.” The result? They may “slow down on their own, as they see that the opportunities are drying up”, or, like other buyers, “keep gaining momentum” and end up in an overcrowded field.
Singh sees increased M&A activity on the horizon for telecommunications (to enhance economies of scale), energy and utilities (to break up some monopolies), and financial services. As for the spike in recent M&A activity among Indian companies, he notes that success rates for deals in India “have become similar to the US and … are much more around, having a viable strategy driving the transactions and not just a deal-making approach.”
Commenting on Tata Steel’s recent $12.1 billion takeover of Corus, Singh sees a pattern similar to Mittal Steel’s “coming in and providing new and different ways of managing the assets. That’s an interesting trend and I think that it will continue. And I think that they will remain disciplined because they are entering an international market and they know that they have to be very careful about hard currency. So, I expect that those transactions are likely to go well.”
The “myth of market
share”: Can focusing too
much on the competition
It is a common practice of many companies to focus their attention on grabbing market share from their competitors. But such efforts can actually be detrimental to the firm’s profitability, according to Wharton marketing professor J. Scott Armstrong.
For years, Armstrong has been conducting research showing that competitor-oriented objectives, such as setting market-share targets, are counterproductive.
In 1996, he co-authored a study concluding that such objectives were negatively correlated with return on investments for 20 major corporations during five nine-year periods. In a new paper titled, Competitor-Oriented Objectives: The Myth of Market Share, he and a different co-author, Kesten C. Green of Monash University in Australia, summarize 12 new studies that add additional weight to the original conclusion.
Although business has long been likened to warfare, the authors write that they “have not found a single paper that challenges the finding that competitor-oriented objectives harm profitability. While advocates of market-share objectives have provided no evidence to support their contention, their writings seem to have had a big impact” on strategic-management research and executives’ beliefs that increasing market share is a worthwhile goal. Armstrong and Green also note that many management textbooks erroneously “repeat the claim that increasing market share will boost profitability”.
Armstrong points to Toyota as a contemporary example that appears to underscore his long-held contention about the myth of market share, noting that while it is a profitable company and expects to build more vehicles than any other automaker in 2007, grabbing market share is apparently not one of its goals.
“We’re not saying companies shouldn’t pay attention to their competitors; they might be doing reasonable things that you may also want to do,” Armstrong says. “What we’re saying is that the objective should not be to try to beat your competitor. The objective should be profitability. In view of all the damage that occurs by focusing on market share, companies would be better off not measuring it.”
Losing an employee
doesn’t have to mean
One company’s loss is another’s gain when an employee jumps ship. But a new study by Wharton management professor Lori Rosenkopf and doctoral student Rafael Corredoira suggests that losing an employee, at least in a high-tech field, is not as bad as it seems.
The two researchers came up with their silver-lining finding by studying the effects of “outbound mobility” on semiconductor firms in the US and abroad. By analysing patent citations, they were able to show that companies can benefit from a reverse flow of knowledge that results when an engineer or other technical expert moves on. Why? According to Rosenkopf, there are social networks that transcend companies and allow the employees left behind to gain access to the knowledge being generated at their colleague’s new place of business. She is not talking about corporate spying, but rather the flow of ideas and information among professionals who work in the same field.
The study’s findings, published in a paper titled, Learning from Those Who Left: The Reverse Transfer of Knowledge through Mobility Ties, call into question the conventional wisdom that losing employees means losing knowledge. “Firms can wind up learning when employees leave their firm,” Rosenkopf says, noting that it’s critical to keep the departure “as amicable as possible”.
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(This column will carry contributions from Wharton School ‘s faculty, staff, students and alumni and will strive to be relevant and meaningful for those living and doing business in Southeast Asia. As this column evolves over the next few months, you will read about innovations in management across various business categories that can make an individual, a team or an organization, a global leader.)