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Is consolidation the solution?

When I was at school our teachers used drosophila (another name for the common fly) to explain genetics. The advantage of using these creatures was that their rapid reproductive cycles reduced the time necessary to study them…

The world of IT is a bit like the world of drosophila; we also tend to make things happen quickly so that we don’t get bored. What is true one day may be false the next, what was once certain becomes uncertain. 

We have just seen three mega takeovers: LinkedIn by Microsoft, Samsung Print by HP and Avnet by Tech Data. Wow! These aren’t just pebbles causing ripples in the pond; they’re a major meteorite shower.

The underlying strategy behind these mega-fusions is, of course, a considerable economy, based on the pattern that’s as old as time: the bigger one is the stronger one is, with a certain number of variations such as “Too big to fail”, “It’s better to be envied than pitied” etc.
This pattern goes back to ancient times, mirroring a biological fact called the maximum power principle.

The Maximum Power Principal (MPP) stipulates that biological systems organize themselves to increase their power whenever the constraints of the system allow it. MPP could explain a variety of ecological models because, as far as biological power is concerned, the winners are those species that have acquired the greatest power. The consequences of this are that men want to be rich, companies want to be big, states want to dominate…

Of course this principle has its limits. For human beings, when power is too concentrated and the common good is affected, the sum of individual powers tends to overturn the situation (e.g.: revolutions).

In economics, too great a concentration will ultimately kill innovation. In the United States the Sherman Antitrust Act and Clayton Antitrust Act were set up to regulate “concentrations” (like monopolies) that become too great, precisely to try to avoid this. The problem in a world economy is that such acts have become inapplicable; a dominant position within a country is no longer real on the world scale when countries themselves are in competition with each other and companies are their flagships. So we don’t worry about them having a dominant position on a local level if we can preserve the strength of our champions on an international level. Today then, there is a context which, on a national level, actually favours situations of monopoly.

Another factor favoring a tendency towards consolidation is that financial concentration incites industrial concentration. What with states being in more debt than ever before when it comes to paying, and taxes having reached the upper limit of the Laffer curve (too much taxation kills taxation), sooner or later government bonds will no longer be trusted. Those with significant financial funding are turning more and more often to corporate bonds.  This financial influx, favoured by easy money from the central banks, tends to go to solid, and therefore big, companies. In September,  Sanofi (the pharmaceutical group) was financed at a negative rate. This easy money will feed the race for size.

So the system in its entirety contributes to this obsession with size, and today there is no safeguard.

Now, what does history teach us?

First of all that nature abhors two things: a vacuum and imbalance, but also that when faced with exceptional circumstances, size, strength and power are not necessarily an asset (the end of the British Empire, the extinction of dinosaurs, the Titanic…).

If there is a good chance that the current trend will persist, globalization has opened a period of world rebalancing which still has some way to go. Asia is half-way there, Africa has not yet started. We have some leeway…unless…unless something extraordinary happens. A kind of financial meteorite, like for instance,  the subprime mortgage crisis multiplied by ten.

Global liquidity accounts for almost 30% of worldwide GDP, approximately 20 000 billion dollars, compared to 6% at the end of the 90’s. We are in a world where risk is no longer remunerated and money flows freely. It’s a bit like constantly giving alcohol to an alcoholic so that he doesn’t realize he’s an alcoholic.

Today, many consolidations are made without necessarily having to create value, but rather because of financial opportunity or because of cost constraints. Such concentrations, born of financial logic, risk being fragile and badly adapted to a period of strong economic volatility. Financial strength cannot replace agility and a clear business strategy.

So, are these acquisitions of LinkedIn by Microsoft, Avnet by Tech Data or Samsung by HP a good thing? For the market in the short term probably not, for its players everything depends if they are the prey or the predator, and for the predators…time will tell. If the acquisition of LinkedIn by Microsoft is an offensive one, the other two are defensive. LinkedIn will probably allow Microsoft to create wealth. HP and Tech Data will gain in size but will they gain in agility? 

After the meteorite in the cretaceous period only the small mammals survived because being big was a handicap.

By Jack Mandard CEO compuBase