My 37-year gig in corporate America went off the cliff earlier this summer when I was laid off from a large dysfunctional company we'll call "DysCo". For background, check out Part 1, Part 2, Part 3, Part 4, and Part 5, Part 6, and Part 7.
In Part 8 of our series, "Corporate Life In The Rearview Mirror", we examine what happens when companies grow by gobbling up other companies through acquisition.
For a publicly traded company like DysCo, the imperative to grow was a major focus of the executive team. Organic growth - growing as a result of adding market share through excellent marketing and stellar delivery to meet or exceed client expectations - would be one option. Organic growth can be a reliable indicator of good performance; it's hard to fake. It also takes time, and a great deal of management focus. It's also extremely difficult to achieve organic growth in challenging economic times.
As a result, DysCo opted for growth by acquisition: buying its way to achieve an almost dizzying rate of growth. In this case, a challenging economic environment can be an advantage. Smaller companies who suffered setbacks when their customers fell on hard times teetered on the brink, enabling DysCo to buy them for pennies on the dollar in some cases.
There are some compelling reasons for a company to grow by acquisition, provided that the acquisitions are part of a logical and carefully executed plan. These include:
Diversifying the customer mix: adding new market sectors for your existing products and services can establish a foundation for future growth while offsetting downturns in a particular sector that could jeopardize the stability that investors like to see.
Adding geographic reach: expanding your operations to more regions or countries will allow you to better serve large clients, while buffering your financial performance against economic setbacks in particular geographies.
Adding new products or services: acquiring companies that offer something your existing clients might need could help you become their "full service" provider... as long as your ability to maintain service and quality aren't compromised by the distraction and disruption of acquisitions.
Eliminating competition: what better way to get your pesky competitors out of the way than to buy them up and fold them into your firm? If their customers follow them (and you don't lose all the people who kept those customers happy), this is a potential win/win situation.
Generating more operating income and profit: this is the driver for many acquisitions: show that the company is getting bigger and making more money, in hopes that investors who don't delve into the underlying numbers will be dazzled by double-digit growth, even during a recession.
There are also some less than brilliant motivations for growth, including:
Ego: if your executive team is like DysCo's, they love the idea of lording over a growing empire, and seeing their "success" reflected in industry rankings.
Personal enrichment: if your executive team is like DysCos's, the folks at the top operate the place as their personal ATM, cashing out whenever they can, while letting other investors hold the bag. Nothing personal; just business.
Vengeance: once in a while, an acquisition is personal, and hostile. After all, what's more rewarding than taking out a competitor and folding them into your Borg Collective? It's a two-fer.
Growth for the sake of growth: "Growth for the sake of growth is the ideology of the cancer cell." -- Edward Abbey. Enough said.
Follow along below the expectation gap for more...
I found myself folded into the DysCo Borg Collective as a result of a series of acquisitions, beginning in the early 1990's. I was working at a small firm that was born as a spin-off of my first job in the business. Three guys left and started their own company, and did very well, growing to over 100 employees in about five years. This privately-held firm did not have to answer to Wall Street, just to our owners and our clients. In retrospect, these were the best of days in many respects.
That little firm was bought up by a group of investors who made it the northeast US "flagship" of a network of firms, again, privately held. So far so good. We went from a firm of a little over 100 employees to about 300 employees. Life didn't change much.
Investors aren't all that patient, though, and they soon sold out to a larger national firm, still privately held, but run by a CEO obsessed with growth. Someone who had no reservations about stepping on their mentors, kicking them to the curb, and showing up on the cover of industry publications as a rising star. Uh, oh.
Soon, that company was bought by a large Fortune 500 company and we were off to the growth races. Big time. With a massive infusion of shopping money from our parent company, we acquired some of our major competitors. The Numbers ruled everything. We lived and died by our quarterly results. Still, thanks to a highly focused leadership team, we tightened up our performance and became quite profitable, attracting the attention of...
DysCo, who wanted to add us to their growing Borg Collective. After all, our profit margin was much higher than theirs, and they wanted the recipe to our Secret Sauce.
Some of us - myself included - maintained some of our customers throughout these perturbations. Other clients, disappointed by lack of focus, loss of key people who were servicing their accounts, and increasing costs, looked elsewhere to mee their needs.
Growth by acquisition may look great from the outside, but from the inside, it's a mess. Problems at DysCo included:
Ineffective integration: turns out, buying up companies that used to be cut-throat competitors and asking them to "play nice" isn't that successful. It takes more than new business card and letterhead to make everyone feel welcome. Add to that managers from one entity now overseeing the other, and you've got some real battles raging.
Staff departures: in a sort of reverse Darwinism, acquisitions seem to drive out the good, entrepreneurial people who say "I don't need this sh*t", while retaining the deadwood, or at least those who lack the skills and ambition to launch their own firms. This phenomenon depleted DysCo, while enriching our competitors with the addition of some awesome people with great client followings.
Management competition: looking to make a name for themselves (and ensuring their future bonuses), managers saw each acquisition as an opportunity for advancement. They focused only on those metrics that improved their odds, while letting the rest of the business objectives languish.
Client departures: believe it or not, some clients were not impressed at DysCo's tens-of-thousands-of-employees stature. Why would they be? No economies of scale were passed along to the clients; the profits all went to the increasingly insatiable executive team. Service suffered, key people left on their own or were witlessly laid off. In this relationship-based businesses, many of the customers follower their account managers and teams to more service-oriented pastures.
Sytems and processes: the simplest of transactions at our former companies became a labyrinthine maze of non-value-added extra steps to meet DysCo's array of new requirements. Quality and customer service were subordinated to "consistency", eroding our profit margins, and driving many good customer-focused people out the door.
Setting aside these unfortunate outcomes, let's get to the bottom line: how did these acquisitions help DysCo's stock price? Well, their current stock price is down 45% from the where it was when they began their largest acquisitions.
No worries, though. Now that they're one of the "big boys", DysCo hired the MBA whiz kids from Bain & Company to turn the place around. For only a couple million a year in fees, Bain & Company provided management consulting services for the past four years... of continued decline.
They designed a gigantic new management structure for DysCo and when - as well all predicted - that wasn't sustainable, they explained how to take it apart and "flatten" it again. Talk about "cutting edge" ideas! In reality, the only cuts were made to people like me - thousands of us - who were tossed into the volcano to placate the Gods of Wall Street.
I might not have liked that, but Wall Street seems impressed, as DysCo's stock price has been crawling back out of the abyss.
Who knew that the secret to growth by acquisition was keeping the clients and the contracts and getting rid of the employees? After four years of sizeable acquisitions, DysCo still has roughly the same number of staff. If they could find a way to get machines to do what we did, they'd be down to just the executive team and a few financial folks to update them on their personal net worth on a real-time basis.
The only problem? Many of the clients are onto DysCo's schemes. Turns out you can fool some of the people some of the time, but not all of them. Some are turning to the departed folks for continuing service. So as the DysCo dinosaur watches the sky, wondering why that bright object keeps getting larger, the wily little mammals moving in and setting up shop. Darwin still rules. It's all good.