The language of acquisitions resounds with military images of victory and defeat, but what is the strategic logic of these war games, so beloved of chief executives seeking territorial gains?
Vodafone's take-over of Mannesmann offers some clues. Apparently, it all started last October when Germany's Mannesmann acquired Orange, a competitor of Vodafone in the UK. Vodafone saw this as an invasion of its home territory. Thus it boldly initiated a bid for Mannesmann. The hostile move had to overcome nationalism, and the fact that Mannesmann had been doing a great job for its shareholders.
Indeed, Mannesmann's chief executive, Mr Klaus Esser, continued to do his shareholders proud with the deal he squeezed out of Vodafone at the surrender. Mannesmann shareholders will receive 49.5 per cent of the combined company's equity, while contributing only 31 per cent of profits. Although swayed by the generosity of Vodafone's final offer, they must also have had faith in the deal's prospects, since they were paid in Vodafone shares.
Why was Vodafone prepared to pay so much, in addition to almost $1billion (€1 billion) in adviser's fees for the biggest deal in history? It appears that capturing Mannesmann is seen as a stepping-stone to industry domination. Some argue that size matters in telecoms. Larger players should be able to dictate technical standards for the next generation of technology.
Meanwhile, other players in the telecoms industry gear up for their own battles. It seems the likely reaction to the cut-and-thrust of Vodafone-Mannesmann will be a wave of panicky consolidations across Europe to counter the size and power of the newly combined group. This has caused sharp price rises in shares of potential take-over telecoms targets.
It is debatable if size is critical, however, in an industry where the rules keep changing, for example size can cause sluggishness where nimbleness and flexibility are required.
An extension of military reasoning suggests companies sometimes believe the best way to conquer a competitor is to acquire it. But if the enemy is strong, the acquisition premium will be high and hard to recoup. If weak, it is not worth bothering about.
In business, a less costly, more effective way of defeating a rival may be to out compete it by building a sustainable competitive advantage, attracting its customers. It might finally be overcome by its comparative weakness. Even if defeating a competitor by establishing some advantage is not feasible, in war as in business, opponents can be neutralised by forging alliances with them.
The premise that size ensures survival in global industries is provoking a wave of mergers and acquisitions in the automobile industry. Yet two profitable car companies, Peugeot and Honda, are prepared to defy the conventional logic. Both are investing to improve their product offerings and rationalise their costs, in the belief that they will have more control over strategies and implementation as independent self-contained firms.
In a twist of the reasoning that the best way to vanquish the enemy is to acquire it, and the "friend of my enemy is my enemy", companies will acquire others perceived as potential merger or friendly acquisition targets of their rivals. Vulnerable companies, perhaps in an unattractive industry, may attempt to build a better stronghold by buying a company in a promising industry. But this reasoning does not always work, particularly when a company tries to buy another in a "hot" industry. It can end up paying a huge acquisition premium. Then, if the acquired company is too far removed from its original industry, the buyer may not have the management skills to run its expensive new possession.
Similarly, firms frequently use acquisitions to move into promising high growth geographical markets, the main motive for the Telenor/BT battle to acquire Esat.
Generally, acquisitions are a means of expanding internationally. Wal-Mart's preferred method of international expansion is by taking over supermarket chains. It assumes it can apply the Wal-Mart mass discount merchandising formula to squeeze more value from stores acquired.
Interestingly, Wal-Mart's attempts to penetrate the European supermarket arena have provoked a series of defensive moves among existing incumbents, in the form of mergers, for example between France's Carrefour and Promodes.
Companies which buy others outside their own home markets may have less control over what goes on in their subsidiaries. They are more dependent on the skills and loyalties of local managers in the acquired company. Even the mighty Wal-Mart is not invulnerable in its international adventures. The further it goes from its home base in the southern US, the less certain that its "WalMartisation" formula will work. Or it may be that the formula will not really add any value over and above what the acquired company would have done on its own.
Some acquisitions do improve the strategic positioning of the acquirer and create value. But history has shown that in take-overs, unlike military warfare, the spoils usually go to the vanquished rather than the victor. The triumphant party may be the one which pays the price for pyrrhic victories, a victim of the "winner's curse".
Dr Eleanor O'Higgins is a lecturer in strategic management and business ethics at UCD graduate business school
