It’s funny isn’t it? Good gardeners who tend to prefer to buy a small seed and plant it and water it, nurture it and watch it grow into something than to just buy a plant, ready-made, off the shelf of a garden centre. When it comes to business though it seems to be the other way round; your typical business person is absolutely addicted to growth, they love their companies to go from small to large or medium to large or large to super-large, love growth, in fact never question whether growth itself is a good idea. They love growth but they tend to think the easiest way to get it is not to nurture some small idea and build it into something. No, they think the best way to do it is to go out and spend their shareholders’ money on buying another company.
Now I start with a very slight prejudice against acquisition routes to growth over organic growth because one creates something and the other just redistributes it. The organic growth takes something small and produces it into something large. The second one doesn’t really involve production, acquisition really just involves shuffling around who owns an existing asset. But why might there be too much acquisition? What’s going on here? Why are executives keener on buying companies than on creating them? Well it might be that their rewards hinge more or less on the size of the company they’re running and the importance of the company they’re running, so why spend years and years building up a large company if you can get one very quickly.
Now, here’s an idea for how we could make sure that executives running companies on behalf of their shareholders don’t acquire and go on spending sprees too often or too much. Here’s the plan: Instead of selling, when Company A want to take over Company B the shareholders of Company B just have a vote on whether they want to sell their shares to Company A, no, you say that the shareholders in Company A have to have a vote first. The shareholders of Company A have to say yes, we support this takeover, we’re utterly behind it, it’s our money you’re spending on this takeover so go for it. Quite often they won’t. Extremely often in fact. When a takeover is announced the shares in the acquiring company will go down as a result, as the shareholders think oh cripes, here the management are spending my money on something I don’t really want.
If you had a system in which the shareholders of the company that’s doing the buying had to approve the deal as well as the ones, the company that was being sold had to approve it, maybe we would only have better and more carefully thought out takeovers and acquisitions.
That’s my opinion. You can join the debate with The Open University.