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The Enduring Challenge of Growth

On a day when the announcement of Pfizer’s plan to merge with Allergen to create a pharmaceutical behemoth rubber-stamped 2015 as a record-breaking year for the mega-merger, it is worth exploring the issue of achieving growth in what is an increasingly challenging global economy.

 

Global M&A in the shape of mega-deals is certainly front-page news and propels organisation’s growth strategies into the limelight. However, recent figures relating to M&A activity indicate that outside of the large, high profile deals, there has been a sharp drop in M&A activity – a cause for real concern among the investment banking community. Whilst the weakened equities market and the resultant hesitancy for management teams to engage in M&A when their stock prices are low is one reason for this lack of activity, another is also the restrictive valuations placed upon many potential targets. A third reason and a recurrent theme is a lack of viable targets for many companies within their market.

For management teams in many organisations, a lack of acquisition targets within their markets is a major impediment to growth ambitions. Speaking to business leaders across a diverse range of industries in both large multinationals and ambitious mid-sized groups, the deal-flow has in many instances ground to a halt and for others, the key targets in their industry sectors have already been acquired either by themselves or by other organisations. It is not uncommon to hear these leaders bemoan the fact that the same businesses are often mentioned during acquisition strategy debates or the target they would really like is deemed far too expensive to be a realistic option. Whilst not true for all businesses, many companies across multiple sectors find themselves in an unenviable position of having access to cheap financing but with no exciting acquisition targets to aim for.

The additional challenge for growth which management teams will be familiar with is the inability to further previous international expansion. New markets have long-since been entered and have now reached a level of maturity across many sectors. Organisations have previously spent many years building up their international operations but the current depressed world economy combined with regulation, reduced demand from Asia and other macro-economic factors, has led to many of these operations now displaying limited or no growth and even reductions in top-line revenue performance. International expansion has been replaced by cost-base rationalisation and efficiency measures, primarily led by CFOs, in a battle to maintain profitability across many regions which had been previously relied on to out-perform. Indeed, one feature of the modern organisation is that cost-base rationalisation is no longer a one off project but an ongoing responsibility and most businesses have embraced a culture of continuous improvement around costs and efficiency to improve margins.

An interesting output of the current malaise could be the return to exploring diversification as a strategy for growth. For many years, large swathes of industry have moved away from the “conglomerate” model, instead adopting strategies that concentrated on core business activity and engaging in business disposals to ensure the focus remained on their fundamental operations. Perhaps, as management teams arrive at a point where they have a lean and efficient organisation, limited in market M&A potential and insignificant international expansion possibilities, we could well witness the re-emergence of diversified growth strategies and targeted acquisitions across synergistic but non-core industry sectors to facilitate growth. Is the conglomerate both a thing of the past and the future reality?

Whilst achieving growth remains the key predicament of many business leaders across the globe, perhaps it is a moot point to say that we could be reaching a stage where growth is no longer broadly sustainable year-on-year. Should there then also be an acknowledgement that, with the myriad of factors that can prevent growth in the current climate, growth cannot and should not be a constant target for all organisations? Clearly, the equities investment market in particular is established upon the principle of growth so there would have to be seismic change in the business world before this happens. But the truth is that without a clear and open debate about the limitations of growth ambitions for many organisations, we will be heading towards a new “crisis” that is represented by a lack of growth but does not factor in that many businesses, whilst not growing, are running at optimum and have achieved a relative peak within their sectors. The greater debate may therefore not be around the challenge of growth but discussing what the definition of being a successful business should really be.

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