Tuesday, July 25, 2006

Dumb and Dumber (Part 2, the Dumber Part)

In last week’s blog (July 20), I observed that executives’ quest for the "magic bullet quick fix" often leads them to consider courses of action that are just plain dumb. As an example, last week I discussed the dumb-ness of the prevailing idea that GM’s horrific woes can be fixed by a GM-Nissan-Renault joint venture headed by Carlos Ghosn.

Now I’ve got something even dumber for you. Some people are—I kid you not-- actually talking about a GM-Ford merger. What are these people smoking? Apart from the fact that 60-80% of mega-mergers destroy shareholder value, and apart from the fact that the precedent of the 1998 Daimler-Chrysler deal has halved the value of the combined firms, consider one stark reality. The mega-problems of GM that I outlined last week (legacy and operational costs, quality, design, labor, bureaucracy and such) are also endemic in Ford (though perhaps to a slightly smaller extent). How will a merger fix these problems-- rather than exacerbate them?

The proponents of the deal talk about potential (no guarantee) cost savings with a capitalized value that would exceed the two companies’ combined (and very low) market cap. But so what? Even if you could squeeze out those costs, what do you do about all the problems that made the companies sick in the first place? And where will the cool, high-margin cars come from? Where will the corporate agility and innovation come from? How exactly will you grow the company profitably?

Next month my new book Break From the Pack is launched, and one of the topics you might be interested in what I call “The Dinosaurs Mating Syndrome” which is one reason that so many big mergers fail. Let me quote from one paragraph in the book:

Perhaps the greatest delusion executives have about mergers is the belief that that somehow two bureaucratic, backward-looking corporations will join forces and spawn an impregnable giant. The underlying assumption is that two companies that have individually managed to generate flat earnings and declining share will be able to magically continue their debilitating but comfort-zone strategies by jumping into bed together and getting bigger. But as we’ve seen, companies that merge primarily to protect faltering product lines, obsolete business models and grossly inefficient infrastructures are doomed to failure in a Copycat Economy…… Ultimately, a merger might temporarily prop up any two beasts by providing them better scale and better marketing, but the end result is still extreme vulnerability, if not extinction.

A GM-Ford marriage? Only if you believe that two dinosaurs mating will somehow produce a cheetah. I predict that a GM-Ford hybrid will be a slower, more complex, more bureaucratic, more politicized offspring that would need to be put on life support within 5 years. We need bold initiatives and bolder leaders to fix GM, but asking the company to mate with Ford is surely a “dumber” idea.

1 Comments:

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