Conventional wisdom says that as you get bigger, you’ll be more likely to control your market, whether regional, national or even global. Right?
“Not so,” said Fariborz Ghadar, an international strategist who studies global mergers.
Often those megamergers between giants turn out like bad marriages instead of sound business deals.
Not always better.
The recent rash of megamergers is often driven by the business argument to dominate market share for the corporations involved. Yet research on global mergers indicates that bigger isn’t always better.
Ghadar observed in his research that these megamergers don’t necessarily increase market share, and that other players emerge to challenge the giants’ market share, such as low-cost producers, niche marketers, and smaller firms that can be more agile and are assisted by newer technologies.
In a study of 20 industries over 40 years, Ghadar’s research shows that the upstarts may be outrunning the bigger companies because of new technologies, more focused market niches, more effective integration among units and divisions or simply better customer service.
These megamergers might also reduce flexibility and market response time. In Ghadar’s study, all industries except semi-conductors saw a steady decrease in market share concentration, despite the increased frequency of mergers among the “bigs.”
The $74 billion merger between British drugmakers Glaxo Wellcome P.L.C. and SmithKline Beecham P.L.C. is a perfect example.
While this merger created the world’s second largest pharmaceutical company, both companies had to sacrifice certain lines of business to competitors in order to obtain regulatory approval.
As Ghadar’s research has shown, few of the huge, cross-border mergers reshaping industries around the world make economic sense in terms of profits, market share, or stock price.
Smaller mergers, too.
This note of caution applies also to smaller mergers, where culture clashes and insular thinking within the separate companies limit, or even doom, the anticipated business returns of the merger.
(Judy Olian is Dean of Penn State’s Smeal College of Business and a leading expert in strategic human resources management.)