In the UK business secretary's opinion and that of many business school professors, mergers and acquisitions rarely benefit anyone other than the investment bankers earning hefty management fees on the deal.
Mixed approach right way to merge best of both worlds
Last week, Vince Cable, the UK coalition government's business secretary, made a scathing attack on the "murky" world of high finance in his speech at the Liberal Democrats conference in Liverpool. He admonished the "spivs and gamblers" in the City of London; accusing them of many things including their reckless approach to mergers and acquisitions. "Why should good companies be destroyed by short-term investors looking for a speculative killing, while their accomplices in the City make fat fees?" he asked.
In his opinion and that of many business school professors, mergers and acquisitions rarely benefit anyone other than the investment bankers earning hefty management fees on the deal. What they generally do is create a larger organisation that, in turn, throws up another management dilemma: how it is to be managed. The acquiring entity, whether it was hostile or not in its takeover, will usually adopt one of two approaches: either centralise decision making or take a decentralised view. Both, if not administered correctly, can lead to very painful outcomes.
There are plenty of recent examples where the larger combined entity simply failed: AOL-Time Warner; Daimler-Chrysler; and Amlak-Tamweel are just a few. And when you speak to staff in the entity that has been gobbled up by a larger predator there is a general disquiet, almost a pervading sensation that they are now merely cogs in a larger machine. It's a sentiment that a friend of mine, who recently went through a technological company merger, expressed when he said all decision making had been taken away from his firm and the finance guys from the acquirer's side were now calling the shots and had no idea how to manage an entrepreneurial business.
The world of literature has depicted what can happen when the rulers or the acquirers manage by remote control the ruled or the acquired. Frank Kafka's dark and disturbing unfinished 1926 novel The Castle is a fine example. In the book people are remotely managed by superiors who give orders without truly understanding what their employees are doing; and the employees simply follow the rules because that is what the ruling hierarchy demands. Sound familiar?
In it the protagonist "K" is a land surveyor employed by The Castle, an entity that has no idea what he does and nor does it really care. He tries to meet the decision makers and highlight the value of his work. All his advances are blocked. In the end he is told in a letter from The Castle: "The surveying work which you have carried out thus far has my recognition … Do not slacken your efforts! Bring your work to a successful conclusion. Any interruption would displease me … I shall not forget you."
Unfortunately, like the acquired employee, he is forgotten and his work is meaningless. Companies that acquire are often driven by a compulsive physiological and psychological need for centralisation, control and order. The accountants and administrators install generic dashboards, key performance indicators and other turntable metrics to get a grip of the situation on the ground in the acquired company, without first garnering a deeper understanding of the business.
Often this is driven by the need to report quarterly earnings back to the stock market and meet the expectations of analysts. The compounding effect on the organisation is that entrepreneurship and creativity is killed off. It's why entrepreneurs such as Sir Richard Branson de-listtheir companies - he had no elbow room to manoeuvre. Centralisation of decision making is akin to installing an all-watching eye at the top of the all-encompassing organisational pyramid. The flip side is decentralisation. And large organisations go through periods of oscillation where they flirt with decentralisation before resorting back to direct control from the top. They struggle with the concept of decentralisation because it creates a more entrepreneurial and creative environment, which in itself adds an element of entrepreneurial disorder, for which they cannot codify, compute or create a meaningful metric.
However, the approach need not be mutually exclusive. That is centralise or decentralise. Rather, the criteria should be how are decisions better made? The economist EF Schumacher alluded to this is his 1973 book Small is Beautiful when he referred to the principle of subsidiary function. If decisions are better made lower down the organisational structure then let them get on with it and keep a watchful distance. If, however, through discourse and reasoned argument, those further up the organisation can demonstrate that they will be better at making decisions, then and only then, should they be given the ability to do so. Hence, according to Schumacher "the burden of proof lies always on those who want to deprive a lower level of its function …". Being higher up does not make a manager wiser or more effective.
So if centralisation is the eye at the top of the pyramid and decentralisation is like the market stall in a bazaar, then perhaps we need to create a different metaphor with which large organisations can work. For Schumacher, the most appropriate metaphor was of a man holding a large number of balloons. Each balloon had its own buoyancy and lift. The man did not stand over them trying to bring them under control. Rather he stood below them holding the strings firmly in his hand. And so every balloon symbolically represented its own administrative unit as well as entrepreneurial unit. This twinning of administration and entrepreneurship served both the needs of hierarchy (order and control) and the needs of the market (entrepreneurship).
Rehan Khan is a business consultant and writer based in Dubai