In a recent Business Week story, Atlanta-based Spectrum Brands is profiled. Over the last twelve years, the company has become a large conglomerate by buying a variety of different consumer products companies, including batteries, plant food, potting soil, rawhide dog bones, and aquariums.
From a prior post, we know the test for whether these acquisitions would add value. Indeed, the article notes that managers claimed value would be created through "synergies" and "diversification."
What do you think? How much synergy do you see between producing batteries and dog bones? How about potting soil and aquariums?
Somewhat predictably, synergies have largely failed to materialize and the article notes that Spectrum is currently "hobbled by a massive $2.5 billion debt load, one that is 10 times larger than Spectrum's value on the stock market." The CEO and senior managers have been replaced, and debt is being refinanced.
When faced with the tempting prospect of acquiring another company, remember: "If there is no scope, just say nope". Maybe I should trademark that phrase - another business bestseller perhaps??
In the 1970's business schools were teaching that scare managerial talent should be spread over as many different business as possible. A part of the merger wave of the 1980's undid these unrelated acquisitions.
ReplyDeleteGrowing up in the 70s and reading some of the annual reports that my parents received in the mail, I was always puzzled to run across examples of this -- the strangest one I can remember was Cummins Engine Co. owning K2 Skis between 1970-1976.
ReplyDeleteIt's always a red flag when management uses "synergies" to justify an acquisition but doesn't elaborate on what exactly those might be. Sure, it's nice to hope that 1 +1 > 2, but if the inputs don't overlap, economies of scope become economies of nope. It's difficult to think the managers are totally nuts though when we look at how other organizations, such as Berkshire, seem to diversify so successfully. Perhaps the difference is that Spectrum brought only operational expertise in narrow fields to the acquisition where as Berkshire brings the more "wishy washy" skill of leadership that applies across more industries? I'm sure any support of something "wishy washy" would probably cause the author to shatter his computer...
ReplyDeleteThere is always scope and we just need to find it out. I do Forex trading with OctaFX broker where everything is picture perfect especially with their various offers and facilities with low spread of 0.2 pips for all major pairs plus there is also 50% bonus on deposit, it is a figure which is use able, so that’s why I am able to work easily which allows me to work better and allows me to be successful without having to risk all that much.
ReplyDeleteWhile there may not have been scope in the product portfolio, there may have been intangible drivers that were highly valued during the acquisition processes. If there were large commonalities in customer bases or human capital across target companies, this could have helped to explain some of the strange acquisition behavior.
ReplyDeleteAt first glance there is little/no overlap or obvious 'synergy' between the two companies. However, I don't think this precludes an acquisition that adds to the value of the combined companies. In a prior job at Koch Industries I did a rotation at the (then) recently acquired Guardian Windows, which was a completely new line of business for the parent company. The 'synergy' on paper was marginal at best. The acquisition was made in large part due to the strong overlap of company/employee culture, which gave KII executives confidence that the human capital costs (onboarding, training, etc) would be modest relative to the gains realized by acquiring a highly profitable+high-growth company. Guardian also gave KII a regional foothold and market presence in a part of the country where they previously had little penetration, which provided intangible value from a brand awareness standpoint.
ReplyDeleteI'd be interested to learn about how companies gradually become more diversified in their offerings - when it works and when it doesn't. I was recently at a Walmart info session and when they shared all of the different industries they were a part of, it seemed as random as the industries mentioned in this article. I'm sure that their diversification across industries was gradual and each new acquisition made sense based on their business strategy at the time. Would just love to see a case of a company like Walmart who has such a wide range of holdings and how they built their way to that point in a successful manner.
ReplyDeleteI think this is a very interesting topic. I viewed Spectrum Brands from somewhat of a finance perspective. As an investor you are trying to diversify your portfolio to deter risk, but at some point when you add another investment it doesn't necessarily provide the value of deterring risk. I think we can use this to look at Spectrum brands. At some point acquiring another company is not going to add value, which is why "no scope, just say nope" phrase is well said when approaching Spectrum Brands acquisitions.
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