Djingis Khan had it. Peter the Great had it. As did Julius Ceasar, Asuka the Great and Napoleon Bonaparte; the disease called Expansionism. It brings glory to the ruler and misery to the people on both sides of his deeds. Many of us thought this disease was something we left behind us in a less civilized past, but just as Measles, Mumps and Ebola it pops up from nowhere when we thought it was gone forever. Today the most obviously cases of the Expansionist disease are Russia and Israel. Outright wars are combined with sneakier methods of engulfing territory that simply isn’t theirs. The west tries to cure these outbreaks of expansionism by diplomatic and economic sanctions, but so far probably has not gone far enough. The disease is picking up speed and in the long run that is bad for everyone involved, whether it leads to outright war or not.
Expansionism is even more rampant in business. Here it is completely accepted and even demanded by shareholders across the globe. Sadly, corporate expansionism is also a source of misery. The sum of all corporate Mergers and Acquisitions (M&Ss) has always been negative. 2+2 usually sums up to three rather than four or five. The news of a merger between Nokia and Alcatel/Lucent makes analysts expect improved sales from Ericsson. Employees, meanwhile, worry about which ones of them will be the “cost cuts” that presidents talk about in press conferences. Headquarters will be based in Finland but the Finnish/French row on R&D jobs is sure to go on for many years.
Once in a long while a corporate acquisition is successful, and we read about those cases in business journals because the executives involved are eager to speak about their feat. Volvo Trucks purchase of Renault Trucks and Mack Trucks long seemed to be one of these few successful ones. Failed acquisitions however are mentioned as often as failed sports bets. A search on “lottery” will generate loads of information about wins, and none about losses. The same is true on M&As.
One good way to predict failing M&As is to look for a strong president reporting to a weak board with many owners. In these cases, boards should consider possible side interests such as the opportunity to travel to a trendier city. Insurance company Trygg-Hansa SPP had that situation when deciding to buy Home Insurance Company in New York; a deal that nearly took a highly profitable company down. Was the idea of owning a company on Manhattan part of what clouded the judgement of these bright men? The American Vivendi/Universal deal may be an even better example. This deal was reputedly driven by a president’s desire to get into a “funner” business than supplying water and energy. The prospect of fraternizing with Beyoncé, Lady Gaga and Justin Bieber may have clouded the judgement of CEO, Jean-Marie Messier, leading to a corporate loss of a staggering €23.3 billion in its 2002.
Expansionism in publicly held corporations is almost always a really sad story. Citizens of one nation rarely have reasonable interest in buying service providers abroad. Yet it happens, and the results are often appalling, as in Vattenfall´s long list of failed M&As in Germany, Poland and the Netherlands.
Per Weidenman, Senior Analyst at Bisnode, points out that companies maintaining long term profitable growth are rarely involved in M&As. These companies build their success on innovation leading to product and service excellence. This is not always fancy. Swedish trading stars Jula, IKEA and H&M are good examples. All three are led by a strong entrepreneur’s family keeping CEO Megalomania away. The companies grow by consistently coming up with better stuff at lower prices than the competition. That way these companies are like the ruler that focuses on peace and prosperity. A list of famous Kings and Queens of the world contains few such examples. Historians overlook them, or just find it boring to study rulers like Akbar the Great, the Indian ruler who tripled the wealth of his empire by means of an taxation system, land reclamation and huge agricultural outputs of cash crops.
As an investor I try to favor these companies, and stay away from expansionist follies.