Problems with Acquisitions

Too Much Diversification

In the drive to diversify the company’s product line, many companies overdiversified.  As a result of overdiversification, companies may have become overly complex and, as and a result, too difficult to manage effectively. Excess or overdiversification is not universal.  It is dependent upon two factors: 1) managerial expertise and 2) type of diversification.

Information processing requirements are much higher for a related diversified company (compared to its unrelated counterparts) due to its need to effectively and efficiently coordinate the linkages and interdependencies upon which value-creation through activity sharing depends. In addition to increased information processing requirements and managerial expertise, overdiversification may result in poor performance when top-level managers emphasize financial controls over strategic controls. Financial controls may be emphasized when managers feel that they do not have sufficient expertise or knowledge of the company’s various businesses. When this happens, top-level managers are not able to adequately evaluate the strategies and strategic actions that are taken by division or business unit managers.  As a result, Top-level managers tend to emphasize the financial outcomes of strategic actions rather than the appropriateness of the strategy itself. This forces division or business unit managers to become short-term performance-oriented.  The problem becomes more serious when managers’ compensation is tied to achieving short-term financial outcomes.  Long-term, risky investments (such as R&D) may be reduced to boost short-term returns.  In the final analysis, long-term performance deteriorates.

The experiences of many companies indicate that overdiversification may lead to ineffective management, primarily because of the increased size and complexity of the company.  As and a result of ineffective management, the company and some of its businesses were unable to maintain their strategic competitiveness.  This results in poor performance.

As noted earlier in this chapter, acquisitions can have a number of negative effects. They may result in greater levels of diversification (in products, markets, and/or industries), absorb extensive managerial time and energy, require large amounts of debt, and create larger organizations.  As a result, acquisitions can have a negative impact on investments in research and development and thus on innovation.

Reducing the emphasis on R&D and on innovation may result in the company losing its strategic competitiveness unless the company operates in mature industries in which innovation is not required to maintain strategic competitiveness. Companies can implement acquisition strategies to extend the scope of the company. When this happens, companies may view acquisitions as and a substitute for innovation.  But, this can negatively affect their strategic competitiveness. As companies extend their scope by acquisitions rather than by innovation, they may see acquisitions as a cure whenever they encounter stronger competition or lose their strategic competitiveness in some markets.  They respond by making further acquisitions, developing fewer innovations, and then reinforce the cycle by making additional acquisitions.  As and a result, long-term performance suffers.

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