It never stops amazing me the attitude of Banks, Insurance companies and electricity supply companies that place no value on holding onto companies yet are run by some of the top earning bosses in the country chasing expansion by acquisition rather than customer growth
That's because the world of large corporations marches to a different drum to the 'real' world of profit and loss.
If you are the CEO of a corporation that, by making a key M&A, can move from $5bn turnover to $10bn turnover, then you and the rest of the exec.suite, as well as the board, can expect to gain large share options and other financial benefits.
A set of juicy M&As also sets you up for a better career elsewhere. You appear on the radar of those looking for a new CEO for an even larger corporation. You leave your present company, possibly in a rather precarious state, overloaded with debt and burdened with subsidiaries that lose money and a year or two after you have left, the chickens come home to roost and losses are reported. By that time you are out of the picture and it is all the fault of the poor sap they hired after you left!
"I've only been gone for 18 months and already the place stats to fall apart!" you can say.
You are the magic boy that turned the company around! Just look at Tesco and what happened under Terry Leahy - huge expansion of turnover and profits at all costs. All that expansion came with a sting in its' tail - a sting that only today sees Tesco recovering!
Other supermarkets were not so lucky - see the history of Fine Fare, which became Sommerfield. It M&A'ed itself into oblivion!
M&As tend to escalate the remuneration packages of the exec.suite in ways that natural growth does not. I know of one Nasdaq listed company (my wife's former employer) whose CEO began as an apprentice, went on to study engineering and the company then paid for his MBA. When he made CEO 10 years ago, the company had a market cap of c.a. $200m. Today, under his guidance of natural growth, the company has a market cap of nearly $2bn and his total pay package is worth $2m.
Compare that with hi-tech company Avid (Nasdaq listing 'AVID'). Ten years ago it was worth well over $2bn, but today, thanks to a series of misguided M&As by 'hell-for-leather' CEOs, it is worth less than $190m. But here's the kicker - each M&A meant a step-up in pay for the CEO, so today the current incumbent-incompetent gets a total of $6m!
The lesson is (for those aspiring CEOs of this World) - expand the company to almost ten times its size and value through natural growth and you could get $2m p.a.
BUT - bring the company to its knees by buying up a series of loss-making turkeys that have to be subsequently dumped at fire-sale prices and in doing so, reduce the company to a pathetic shadow of its former self and the board will pay you $6m.
It sounds crazy. It sounds bonkers! But that's the world of the publicly listed company!
