This article are provided for information purposes only, and are not intended as legal advice.


Businesses – how big do you need to grow to be the right size?

June 12th, 2009

Ever notice that companies continue to grow and buy businesses?  The size of the take over becomes bigger and bigger when money is available.  Is this good for the company – it depends, is this a venture capital firm buying it or a synergistic partner.  Vulture firms look to make money and lots of it.  They acquire big companies with relatively little equity as a percentage of the deal.  For example Vulture fund A acquires a company for $30 billion.  They may have $3 billion of equity in such a deal or 10% of the purchase price.  You nor I could acquire a company based on this leverage but there are enough money paid in fees that everyone wants to participate.  After acquiring the company, they slash and burn the company, cutting things back to bare bones and magically, profits go up.  No money has been reinvested in the company to make it grow and work for the future.  In five years, the company is now showing 3 good years of profit and the Vulture firms take the company public.  What happens, profits drop immediately – why?  No money was spent on infrastructure and building new products.  Everything had a short term view and no long term decisions of the company were looked at.  As a result, short term profits were generated.  Many companies will invest in the short term, have lower earnings for now but build for the future.  The Vulture funds have no intention in being there in the long term.

 

In many large companies, the culture has become compliant and a lot of fat develops within the corporation.  Corporate managers hire good people but they also want to hire people who will not take over their position therefore this may not be  the best talent you can buy for your money.  What is good for the manager may not be good for the company therefore there is a built in excess fat in the organization because human nature wants you to always hire someone inferior to you.  In private businesses, the employee will not overtake the owner by virtue of ownership in the company so this may not be as much as problem at senior levels in private companies.

 

If a large firm acquires a competitor, is this good for business – sometimes if costs can be reduced but over the long term, are these companies more profitable or is this an ego trip for the chairman of the large corporations who can state that he/she is the CEO of the largest company.  Does he get paid more, get more perks, improve ego or have more power or all of the above?  In the end, are the customers and the shareholders better off.  Look at GM and Chrysler.  They ran companies, continued to acquire larger companies but forgot to look at their operating costs and respond to the consumer needs and competition. In the end, the government has bailed out both companies.  What is the first thing that these companies do – spent government bailout money on advertising to state that they are a better company now that they went bankrupt.  Aren’t they spending money on the wrong thing?  Instead of investing the bail out money in the company they already started to waste money.  If this is the waste that the consumers see, what else is not being spent efficiently?


Filed under: Business strategies — Gary Landa @ 8:38 am


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