I admit that I was amused by the recent Sunday Times cartoon of Sir Ken, showing him covered in wounds as a result of his third profit warning following the take-over of Safeway some 12 months ago.
But has he erred?
At first sight the deal made great sense, even though he was taking over a business two to three times bigger than his own. Size, we are told, is the key in the supermarket game – size means more buying power, which equals cheaper prices which equals more customers and so on. The so-called virtuous circle.
But we hear that all the key management from Safeway has been removed, and that Morrison’s blend of Yorkshire retailing, mushy peas, jumbo-sized Tetley tea bags and Yorkshire puddings, does not seem to be such a hit in genteel places like Wokingham and Kingston.
Suddenly the boys at Sainsbury’s have smiles on their faces – they are at last gaining market share and guess where from – the hapless Safeway, sorry, Morrison’s.
Yet before we spend too much time gloating over Sir Ken’s apparent discomfort, I know that if I had been on his board, I would have completely backed his bid. Size does matter. Strategically it must be a good move but at the moment it looks like the post-acquisition management of the deal has been poor.
First of all, Morrison’s success has been built on organic growth, not acquisitions. Managing companies you have taken over is an acquired taste – the more you do it, the better you get or, put another way, you learn from your mistakes. And yet Sir Ken has taken not just a little bite to taste what the acquisitive diet is like, but an enormous chunk, big enough to choke on.
Secondly, there is a great temptation to change the brand names of companies that are acquired. But in many cases this can lead to real problems. In this case, Safeway supermarkets have become Morrison’s. Had they kept the Safeway brand, but changed the format, the outcome could be different, because another common bear- trap is merchandising.
Changing your merchandise mix changes your customers. So why do it? After all, we know that keeping existing customers is much easier and a great deal cheaper than acquiring new ones. It transpires that Morrison’s have changed both brand and formula. It looks like this was imposed on their acquired customers, regardless of their brand loyalty.
I suspect that the Morrison team has also made another howler – misunderstanding what it was buying. At a recent private dinner for ‘big hitters’, the topic of conversation veered to acquisition and, in particular, ‘adjacent acquisitions’. These are purchases that are not exactly in the same space as your company but have a number of similar characteristics. An example would be Aviva’s acquisition of the RAC – similar business but not exactly the same.
The dinner-party conclusion was that adjacent acquisitions are far riskier than buying your main competitor. Perhaps Sir Ken believed he was achieving just that, but in reality Safeway has turned out to be an adjacent target – similar business (food retailing), but a very different customer base.
The final problem I detect centres on over-confidence. They got rid of Safeway’s key management, believing theirs was better. In general, I believe that you should take a cool look before leaping. The management of the business you are buying may not have performed well, but often the team just below the top level consists of the people who really understand the operation and are just bursting to get their chance.
Amber lights for acquisitions
But don’t give up on the acquisition trail. You might conclude that you should only do deals that are smaller, and are exactly in your space. And if no exciting targets come up, then pay out your excess cash to shareholders in dividends. Don’t take risks with other people’s money!
Yet a number of well-researched surveys in both the UK and the US show that acquisition-based companies have outperformed those that have not acquired. Granted, one out of three deals went wrong, according to the research, but the ones that worked and the companies that were consistently active in M&A remain the success stories of the stock markets.
Green is go
As always, timing is key. Acquire at the top of the stock market with the wrong currency – cash – and you get a disaster similar to that which befell GEC. But do it the right way using the right currency (your shares) and you can build real value, as demonstrated by Vodafone.
A valuable lesson I learned from Chris Gent was how Vodafone used best practice across its group companies throughout the world. Techniques on customer retention, increasing average customer spend and stopping churn can generate massive extra revenue, particularly in volume businesses, and make all the difference as to whether acquisitions succeed or fail.
And so lastly, back to size. Sage has now acquired some ten businesses in North America. We are just beginning to see the benefits of centralised purchasing and a high-quality central management team that can add value across the spectrum – R&D, HR, marketing and finance.
So don’t give up, Sir Ken. The stock market is an impatient place and a hard taskmaster. But get your management sorted out and being bigger will start to show the increased dividends your brave acquisition deserves.
Michael Jackson is chairman of Elderstreet Investments, the leading technology venture capitalist, which he founded in 1990. He is also chairman of Sage, the FTSE-100 accounting software group which he has been closely involved with for the last 20 years, since its unquoted days. Michael is an entrepreneur and legendary investor in his own right.