Wednesday, October 24, 2012

Corporate Elephantiasis

"The BBC is an archetypal case of corporate elephantiasis, an organisation too big to take clear and swift decisions. Its senior managers are lost in a corporate maze of directorates, divisions, Chinese walls and spectrums of delegation."

The popular belief in merger and acquisition to deliver economics of scale overlooks the common reality "that high executives from one of the previously separate corporations would be at loggerheads with executives from the other, that from top to bottom the cultures of melded corporations wouldn’t mesh, that cost savings wouldn’t materialize, that earnings would not be smoothed out, that purchasing corporations wouldn’t know how to make good use of acquired corporations, that different industries require very different mentalities, that size was achieved by destroying highly innovative, often new companies, that companies make acquisitions not because this creates better economic entities but because it creates more power, more prestige and vast compensation for high executives".

"Many companies try to grow via big acquisitions. These deals are seductive, because you get lots of favorable ink and a love buzz from Wall Street. You also buy time to implement your strategy, if you actually have one, because year-to-year financials aren't comparable and outsiders can't analyze your results. WorldCom is a classic case. Chief executive Bernie Ebbers--make that former chief executive Ebbers--wanted his grandly named enterprise to be the nation's biggest telecom firm. He got up to No. 2 by making about five dozen acquisitions. But when the takeover music stopped two years ago after regulators nixed his proposed purchase of Sprint, it became clear the company was a mess. Bye-bye, Bernie. And with WorldCom stock down 95 percent from its high, bye-bye to $100 billion of shareholder wealth."

Allan Sloan, Memo To Ceos: Bigger Isn't Better (Newsweek via Daily Beast, May 2002)

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