Merger & Acquisition Push to Early Extinction

October 1, 2005; NST Report:

The 2006 Budget send the message that Malaysia wants quality companies and this can be achieve through more mergers and acquisitions to produce bigger-size corporations with better economies of scale.

The Prime Minister, who is also the First Finance Minister said in the budget speech that the government will stop charging stamp duty and exempt real property gain tax on merger and acquisitions for two years. This move is seen as to help companies to “expand operations, increase liquidity, enhance their capital base and achieve better economies of scale.

Malaysia has 1,005 listed companies as at September 28.

The question we should asked is: "Is Bigger better?"

Would merger and acquisition of two companies provide economies of scale?

We should look at HP-Compac merger as a good case-study. The acquisition of Compac by HP, both organization that are giants on their own rights and both are worth multi-billions were merged in the name of economies of scale to enhance bigger PC market-shares, literally intended to reduce the competitive edge posed by Dell Corporation, their main rival.

What is the result and did HP-Compac capture a bigger slice of the market share in the PC market?

The answer is clear and unassuming. Carly Fiorina, the then CEO and the mooter of the merger and acquisition was sack. DELL Technologies in fact captured a bigger market share and the loser was Compac and HP.

Other than HP-Compac, we also heard of WorldCom, Global Crossing, ImClone System, Adelphia, etc, etc.

Locally, we have Anson Perdana, Promet, Ekran, Mancon, Kelana Mas, Pilecon, TRI-Celcom-MAS, Renong, Time-Engineering, Lion Corp, etc.....


In the years pre-1997, Malaysia's economy was booming. Many companies were expanding and acquiring companies at a fast pace. Excessive risks are hastily justified by excessive returns. Poor utilization of resources were camouflaged with higher financial turnover. Companies focus on sales achievements and high volumes of trade. In the frenzy mood, people are no longer sensitive to increased operating costs and wastages. Productivity and efficiency were Hebrew language to Malaysians, and these weaknesses were obscured by higher sales and turnover achieved. CEO’s and their senior executives created the euphoria about their business "success". They got carried away and are often obsessed with corporate images and their personal images. They start by diversifying their business beyond their core competencies; splashing massive amount of money on elaborated renovations and many even build new buildings for their corporate headquarters so as to look successful and great. They make financial commitments in fixed assets without much considerations and proper analysis on those investments, which ultimately tied the company in massive financial obligations and thus put the company in high financial distress. Their overhead expenses were simply growing extensively, much faster than their sales performance and capacity. Suddenly, the economic crisis came in 1997, triggered by the Thai Baht collapse.

Hundreds of corporations and conglomerate collapses into a pile of debts. They became insolvent and the banking system was liquidity strickened and are pushed to the edge of chaos.

The main fault of these corporations lies in the increased costs due to inefficiencies, lack of knowledge and competencies and the inflationary costs of materials or labor. Many companies do not carry out any proper financial analysis such as the internal rate of return and net present value. The risk of financial exposure is one key element that finally broke those companies. These companies get more businesses, but also make more losses.

On hindsight, the crisis has served an unforgettable and important lessons for Malaysian corporations, particularly on the inconsiderate loading and expansion on the market capacity, overstretching themselves beyond its means, adding fuel to the already weak financial situation and driving it into high gearing. The tragic part about this ais that many of these companies do not even know their competitive edge, having uncompetitive high costs and high overheads, and they fail to understand and analyze their productivity and efficiency. Every one of them wants to parade their billions in their turnover and CEOs crave to own corporate airplanes and corporate buildings of their own.

Management today needs to apply their resources efficiently and in an effective way in order to survive in the current competitive business environment. Traditional sources of profitability are drying up, as quality and high productivity are increasingly becoming pre-requisites of doing business rather than providers of competitive advantage. Competitive advantage will be the product of innovation in addressing the needs and desires of a demanding customer base notable for its constantly changing preferences. Innovation is a requisite in every industry as the competition to capitalize on shifting profit zones heats up and the traditional cachet accruing to market share evaporates.

Global and even local competition puts pressure on today's organizations to seek cost reduction, asset restructuring, business process reengineering, business refocusing, quality awareness and to use modern & faster technological processes to improve the productivity and efficiencies of workers. Organization thus have to groom or to procure a new breed of managers who are capable to manage employees and at the same time, create corporations that are both risk-taking and innovative.

As globalization intensifies and technology grows by leaps and bounds, competition in the marketplace has also escalates. As a result, there is a pressing need to streamline, restructure and “right size” organizations.

One of the worst of all fads and formulas to be implemented by management is the great panacea called “downsizing” or “rightsizing”. Executives desperate to show some actions in the face of poor results have determined that quick and dramatic actions required to save the bottom line (and to save their job).

What is obviously amiss is that the bottom line can be renewed through rapid expenses reduction but not real productivity gains. The people that were retrenched were those who were getting things done and those not affected by the downsizing process were management cronies and co-culprits who help suck dry the companies’ coffers. Unless the nature of the work itself is changed, simply removing people does nothing except to worsen productivity.

Management guru Peter Drucker says, “We are seeing way too many amputations before the diagnosis”. The problem is that the productivity of most organizations immediately plummets upon that action.

When a downsizing (often massive firing of people) is announced and implementation begun, productivity plummets because no one knows who will be the next person to be chopped. These cutbacks seldom focus on solely poor performers (as they are usually cronies of top management). The best employees will strike quickly and will be seized by competitors but the mediocre will remain. The contract of loyalty has been broken. The company no longer deserves “loyalty, sacrifices and commitment”.

Downsizing has permitted weak management to escape the consequences of its own incompetence at the expense of the blames, hardworking and performing workers. It is important that management understands that any gains to the bottom line made through expenses reductions, which are not accompanied by revenue increases will contribute towards the organizational downfall.

As declared by Peter Drucker, “no century in human history has experienced so much social transformations and such radical changes as the 21st. Century.” ‘CHANGE’ is threatening.

There is no right way and there is no learning without mistakes. There are stages to transformation. Although an organization may skip over one, inevitably it realizes it must retrace its steps to cover the missing ground. Everyone must accept the premise that fundamental change is necessary.

The old way of doing business is no longer an alternative. Everyone must be aware of the situation everyone is trying to do something – often anything – for survival. No society in history are facing greater challenges than the 21st Century had posed. But equally new are the opportunities of the knowledge society. Access to the acquisition of knowledge is by learning, which will become the tool available to acquire the skills, technologies and knowledge.

The knowledge society will inevitably become far more competitive. Knowledge has become the key resources – for a nation’s economic strength as well as its military strength. Knowledge is not tied to any country and it is portable. It can be created everywhere, fast and cheap. But knowledge is constantly changing. Knowledge always makes itself obsolete within a short period of time. For this reason, the acquisition of knowledge through learning can no longer stop at any age. “Life-long learning” will increasingly be a requirement for any knowledge worker.

In a rapidly changing business world, nothing stays constant even a short while. The worlds around us have changed fundamentally and that attitudes to the cost as well as the benefits of industrial activities and economic growth had undergone a profound transformation.

The underlying causes which reflect turbulence in the economic, technological, political and social environments, ‘Triggers for Change’. There are so many external factors that can suddenly present themselves and make a company less competitive or drive a firm out of business if they do not adapt and respond to the changes.

Companies that are merely focusing on cost cutting without doing anything new or innovative to win new business will achieve their self-fulfilling prophecy of reduction and diminishing into extinction.

Abraham Lincoln has this to say about change: “the dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must think anew and act anew. We must disenthrall ourselves”.

The longer-term changes will certainly result in the need to revise the organization’s strategic thinking and in consequence call for more fundamental changes in the organizational policies and practices.

Technology and knowledge are now the key factors of production and productivity, and cost efficiency. With increased mobility of information and the global workforce, knowledge and expertise can be transported instantaneously around the world. Any advantage gained by one company can be eliminated by competitive improvements overnight.

The only comparative advantage will be the process of innovation where firms combined market and technological know-how with the creative talents of knowledge workers to solve a constant stream of competitive problems, and its ability to derive value from information.

The challenge facing us is how to leverage on technology to gain a competitive advantage. Organizations will need to adopt a mental model to rethink their notions of where value can be created and how they can capture that value. Successful knowledge management applies a set of approaches to organizational knowledge, including its creation, collection, codification, personalization and dissemination, which will lead to achievement of corporate goals and objectives.

The most successful corporations of the 21st Century will be those that are called the Learning Organization. In the view of Arie De Geus of the Royal Dutch / Shell, he says that “The ability to learn faster than your competitors may be the only sustainable competitive advantage”.

Businesses today must view the development of a business and its financial stability as vital issues. Businesses cannot afford to ignore the need to think ahead and make a careful and regular assessment of all aspects of its performance, its ability to be innovative and creative, and its ability to learn and acquire new knowledge, and particularly its competitive strategy and its competitive advantage of their products or services. Long-term commitment to new learning and new philosophy is required of any organization that seeks transformation. Best efforts and hard work will not suffice, nor new machinery, computers, automation, gadgets.

There is no substitute for competencies. It is evident that in this competitive world, organizations and countries as a whole must achieve recognition from customers about their top quality activities at all times in order to conduct business successfully.

Today, all organizations and industries have to go further up the value added chain, producing more technological advance products and services to meet the new challenges. The focus must always be value-added production chain. Low value-added products after a period of cyclical upturn result in low prices, and low margin of profit. To be able to achieve the desired results, the drive must be market led.

Every managers and every business have to take into serious consideration its competitive standing in the world economy and the competitiveness of its knowledge and skill competencies. In order to sustain the long-term growth, organizations have to be innovative, far-sighted, competitive, focused and fast to win in the ever-challenging market. Industry players should also possess strong business acumen, continually improving their competitive advantage and being able to adapt their business to the ever-changing market needs. They have to ensure that their products would have to meet and possibly exceed the desired quality, delivered on time, and within the cost budgeted and most of all, satisfying the needs of the customers and ultimately bring in the desired profit which is the fundamental of why the business organization exist.

Are we ready to face the bare truth and will our corporations thrive in this highly competitive economic environment? Will globalization devour our institutions?

Or, are we still sleeping and hybernating?