The mystery of M&A

According to press reports in recent days, it seems that there it’s trouble at t’mill at my former employer Thomson Reuters. Three years after the takeover, the Thomson family are apparently frustrated by the slow return that they are seeing as a result of bringing together the two information companies.

I’m no economist, and that is maybe the reason why I find it odd that so many people put such faith into such enormous corporate unions. At a general level, bringing together two sets of corporate support services (finance, IT, HR etc) and expecting to see fast efficiency savings from larger shared services is naivety in the extreme. Even if such shared services worked to exactly the same processes and with exactly the same systems, it would take some time and cost to restructure and reorganise them in such a way that you received economies of scale. That such support services will be working to completely different models in the pre-merged operations means that economies of scale (if they can be realized at all) are likely to take significant time and investment. (I’m actually a strong believer in diseconomies of scale.)

In the specific case of Thomson Reuters, however, I was also always sceptical that the merged organisation would ever amount to less than the sum of its parts. The two former companies had an overlapping set of products, and the plan was to consolidate the product set into a single set. The problem with this as I see it is that some customers had Thomson products, some had Reuters, some had a mixture of both, and some had a mix of Thomson and/or Reuters alongside the major competitor, Bloomberg (I am talking here about the systems that the three companies sold into banks and other institutions in the financial services world that made up the lion’s share of Reuters revenue in the past).

Now technology companies, it seems, sometimes confuse the improved functionality that is offered in their new products with a value proposition to their customers (who not only have to swallow the cost of new products, but also the often much greater cost of actually implementing them). For Thomson Reuters, it seemed to me, the risk of trying to force all of their customers on to a new product platform would be that some would refuse, those who were on both former companies’ products would at best consolidate onto one, and at worst would move to Bloomberg because if you are going to have to suffer the pain and cost of changing systems, then better it be to one that is established and proven.

Net result? The overall market shrinks because there are now only two products rather than three, Thomson Reuters overall market share slips down from the pre-merged total, and the costs associated with integration of the two companies decreases overall profit margin.

But then I’m no economist…

When might M&A work? Well, three scenarios spring to mind… when you are buying into a new established market (Green and Black’s acquisition by Cadbury, for example); when acquiring R&D (the staple of most large tech companies); or when acquiring a smaller rival to reduce competition (although such behaviour is often prevented, thankfully).

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