Bigger but not necessarily better
The stated reason for mergers and acquisitions is that bigger companies have more pricing power and economies of scale, and are therefore likelier to bring a higher return than their smaller rivals. That's why the desire to be #1 or #2 is so compelling to executives and stockholders.
But the reality, according to a recent study by consulting firm Marakon Associates may be quite different. In the 1980s and 1990s, according to authors Brian Burwell and Jeremy Sicklick, bigger was indeed usually better:
Their success in building scale both resulted from and led to competitive advantages in serving customers and managing costs. The leaders used these advantages to increase sales, improve cost and asset efficiency and generate superior profitability - producing exceptional growth in shareholder value. This, in turn, gave them access to more and lower-cost capital to fund further investments in growth and scale.
The article notes the oft-cited Jack Welch insistence on being #1 or #2 in an industry. But now, companies like GM, Pfizer, American Airlines, and many others have not been protected by their vast size. Big companies have stumbled often in recent years, while many smaller and more specialized firms have done well fro shareholders.
Across most industries, whether attractive or unattractive, the value of "being different" simply outweighs the value of "being big" for example, in pharmaceuticals (Roche versus Pfizer), electronics distribution (CDW versus Arrow) and property and casualty insurance (Progressive versus Allstate). At the same time, smaller companies across all industries are getting better at overcoming their scale disadvantages.
According to the authors, the companies that are currently thriving have a sane sense of scale that does not necessarily pursuing size as an end in itself. In addition, they are conscious of and manage carefully the problem of organizational complexity
The authors neglect to mention some of the biggest reasons for growth: the ego and the greed of top executives. The long-term interests of shareholders, employees, or customers, can seem like a remote problem when compensation packages are being doubled and tripled, whatever the company's performance.
