Is the urge to merge always a good thing?

Posted on Wednesday 21st November 2012 4:52

The news is full of stories about mergers and acquisitions at the moment. The ‘Random Penguin’ merger has been followed in the publishing market by speculation that Harper Collins is in talks to buy Simon & Schuster. Elsewhere the commentariat of the publishing world are debating whether a new era of industry consolidation will be a good thing for the industry. Will it, some argue, give publishing businesses some much-needed bulk to help them compete more effectively with the other media businesses eager to buy our leisure time. Or is consolidation, as others say, an inevitable precursor to decline: the equivalent of publishers huddling together for warmth as the business environment cools down.

What both sides of the argument are agreed on, however, is that a period of market consolidation is both inevitable and, to some extent, desirable for the publishing industry. But is it really? For evidence that M&As can destroy as much value as they create, we need to look no further than HP.

This week the computing giant rocked the City and Wall Street by announcing that it was writing down the value of Autonomy, which it bought last year for $11.1 billion, by an astounding $8.8 billion. HP then went on the offensive (it had just announced some terrible numbers to the markets) by accusing Autonomy of accounting regularities and saying it would refer the deal to the Serious Fraud Office in the UK and the Security and Exchange Commision’s enforcement division in the US.

Whether Autonomy artificially inflated its values, the advisors got it wrong or HP simply paid too much on the deal is something for the SEC and SFO to decide. What is clear, however, is that when badly handled an acquisition has the magical power to make $9 billion disappear overnight.

This is catastrophic enough for a huge, though admittedly troubled, tech company halfway through its own tricky business transformation. But imagine the damage that a couple of disappointing mergers could do to publishing at large when it’s the whole industry, not just individual companies that is in transition. Publishing is still, despite the recent resurgence of small presses and self-publishing, a highly concentrated business where a small number of companies create and deliver the majority of content to market. Any merger deal that results in a big publisher downsizing or going out of business would have terrible knock-on effects on the rest of the publishing ecosystem.

Given the high stakes involved, we advise publishing businesses considering M&As to leave nothing to chance. We’ve blogged before about the four golden rules of managing an M&A from and IT perspective, as in today’s businesses working culture is defined by their technology. If the systems can’t work together, how can the businesses?

And one last point about HP / Autonomy. There’s a certain irony in HP writing down the value of its investment and laying the blame at the door of dodgy data. Autonomy, which before HP bought it was the star of British IT, built its success on helping companies make sense of business information.