Monday 25th April 2005
Acquisition dangers
Acquisitions can fail spectacularly. Instead of creating extra wealth, they destroy it. Step forward the latest apparent victim – Ken Morrison of Morrison Supermarkets, a man with a 37-year unblemished record of success.I admit that I was amused by the recent Sunday Times cartoon of Sir Ken, showing him covered in wounds as a result of his third profit warning following the take-over of Safeway some 12 months ago. But has he erred?
At first sight the deal made great sense, even though he was taking over a business two to three times bigger than his own. Size, we are told, is the key in the supermarket game – size means more buying power, which equals cheaper prices which equals more customers and so on. The so-called virtuous circle. But we hear that all the key management from Safeway has been removed, and that Morrison’s blend of Yorkshire retailing, mushy peas, jumbo-sized Tetley tea bags and Yorkshire puddings, does not seem to be such a hit in genteel places like Wokingham and Kingston. Suddenly the boys at Sainsbury’s have smiles on their faces – they are at last gaining market share and guess where from – the hapless Safeway, sorry, Morrison's. Yet before we spend too much time gloating over Sir Ken’s apparent discomfort, I know that if I had been on his board, I would have completely backed his bid. Size does matter. Strategically it must be a good move but at the moment it looks like the post-acquisition management of the deal has been poor. Mistakes galore
First of all, Morrison’s success has been built on organic growth, not acquisitions. Managing companies you have taken over is an acquired taste – the more you do it, the better you get or, put another way, you learn from your mistakes. And yet Sir Ken has taken not just a little bite to taste what the acquisitive diet is like, but an enormous chunk, big enough to choke on. Secondly, there is a great temptation to change the brand names of companies that are acquired. But in many cases this can lead to real problems. In this case, Safeway supermarkets have become Morrison’s. Had they kept the Safeway brand, but changed the format, the outcome could be different, because another common bear- trap is merchandising. Changing your merchandise mix changes your customers. So why do it? After all, we know that keeping existing customers is much easier and a great deal cheaper than acquiring new ones. It transpires that Morrison’s have changed both brand and formula. It looks like this was imposed on their acquired customers, regardless of their brand loyalty. I suspect that the Morrison team has also made another howler – misunderstanding what it was buying. At a recent private dinner for ‘big hitters’, the topic of conversation veered to acquisition and, in particular, ‘adjacent acquisitions’. These are purchases that are not exactly in the same space as your company but have a number of similar characteristics. An example would be Aviva’s acquisition of the RAC – similar business but not exactly the same. The dinner-party conclusion was that adjacent acquisitions are far riskier than buying your main competitor. Perhaps Sir Ken believed he was achieving just that, but in reality Safeway has turned out to be an adjacent target – similar business (food retailing), but a very different customer base. The final problem I detect centres on over- confidence. They got rid of Safeway’s key management, believing theirs was better. In general, I believe that you should take a cool look before leaping. The management of the business you are buying may not have performed well, but often the team just below the top level consists of the people who really understand the operation and are just bursting to get their chance.
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