Renee’s Rule™: Two sick companies don’t make a healthy one.August 4, 2009
When revenues decline, and profits are non-existent, companies often believe that if they buy or merge with another company, the increased revenues will solve their profitability problems. In my experience, however, these “solutions” often exacerbate the problems.
To be successful, all companies need the essentials:
- A capable leader
- A carefully conceived plan
- A system for ensuring accountability
When these pieces are missing, a joining of two financially and operationally troubled companies is destined to fail.
An example from one of my clients:
- Company A was in an FDA-regulated industry
- The industry was experiencing both intense pricing pressure and consolidation.
- Company A, with multiple manufacturing and distribution facilities, was not only losing money but was also experiencing both product contamination and delivery problems.
- Company A, which was bleeding cash, bought Company B, which was also bleeding cash.
- Neither company had any of the three essentials listed above.
- After the acquisition, the expected “economies of scale” did not materialize; costs for the combined entity actually increased as a percent of revenues.
- The already stressed delivery system was now even more stressed.
- Expected revenues did not materialize because frustrated customers switched to other suppliers.
- Chaos ensued.
We were able to save the company, but it was a close call…..a very close call…..
Two wrongs don’t make a right, and two sick companies do not make a healthy one.