According to a report by ZDNet, total mergers and acquisitions by the technology industry has already totaled $186.3 billion on the first three quarters of 2006, which already surpassed the 2005 total of $164.6 billion.  It is projected that it will reach almost $250 billion by the end of the year, with close to 4,000 deals.

There are many reasons given for such activities.  Some often cited reasons would be:

a.)     Economies of Scale. Merging companies would allow increased market share, while probably reducing redundancy and duplicate departments, thus insuring lower costs overall, and therefore increasing profit.

b.)     Cross Selling and Synergy. Theoretically, as the story goes, if a bank buys a stockbroker, then he can sell banking products to the stock brokers’ customers, and there would be better use of complementary resources.

c.)     Taxes.  The surviving entity may allow increased write-offs.   For instance, a profitable company buys a losing company to take advantage of the tax write-offs a losing company may have, and thereby benefits.

d.)     Geographical Diversification.  It may be the fastest way to diversify to a new market.

The above are often cited reasons among others that purportedly result in better shareholder value.  However, what is often overlooked are other motives the executives indulge in which could be the REAL reason.  Call it hubris, but one of the obvious reasons is simply the desire of managers and owners to have larger companies to manage, and hence more power and visibility.  The same ego motives that drives individuals to borrow money to buy bigger, more expensive cars and homes they can scarcely afford are the same motives that drives them to expand the company, sometimes irresponsibly, in order to keep up with the Joneses.

While the big guys compete to become the world’s biggest bank, or the world’s biggest oil company, or the world’s biggest media company, many small guys also compete on the honor to become the country’s or the city’s biggest retailer,  or simply the town’s biggest farm, or the town public market’s biggest stall.

The quest to be bigger, whether through acquisitions, or through natural growth has created the world’s most dynamic companies, as well as the businesses’ worst nightmares.  Almost every businessmen can cite examples on experiences that it would have been better to leave well enough alone instead of trying to take on another product line, or open another store, or hire another group of employees that did not quite work out, and resulted, instead of bigger profits, actually losses and even bankruptcy.

However, no matter that businesses and people perish trying it, but growth is almost the holy grail of management.  Companies that missed last years’ number growth even by a percentage point is immediately punished by downgrade ratings, and subsequently a sell off on its stocks.  Simply said, a company that cannot grow its earnings should not be in the stock market at all.

Is it really healthy to be big?  It does seem that the term too big to fail has started to become almost like a monster devouring itself – and the executives as well.  Of course, a company has to grow, but then I would like to believe that there is actually another preoccupation that a CEO should do.  There was actually two quotes that I saw which got me into rethinking again on this growth business.  One of them is "the CEO ’s goal should not be to grow the company. It should be to keep the company healthy. When it is healthy, it will grow."

The other quote was made by Herb Kelleher, the famous CEO of SouthWest Airlines, the fun airline and one of the original low fare airlines that took on the majors.  Southwest was a small player, but for a time, it had a bigger market capitalization and profit than the US’s top 5 airlines.  It was the only airline that enjoyed consistent growth and profit while the bigger players move up and down the sales and profit charts.  And he said, "Think Small and act small, and we’ll get bigger.  Think big and act big, and we’ll get smaller."

During the time that he could not afford it, he competed by avoiding competition head on.  He choose a different strategy – only one type of aircraft, no hub-and-spoke model which was the ideal setup for airlines, and use second tier airports.  He also refrained from offering business or first class seats, a section where the airlines traditionally use for better profits and margins.   But I believe he did something which every small businessman also should do – don’t do something you cannot afford, and put your focus to make sure that your company is healthy first.

In most businesses unfortunately this is ignored  There seems to be an unconscious appeal in being big, and also the logical think that when you become big, the problems you faced when you were still a small company would disappear.  How often have you read about that a merger of two small problematic companies will create a stronger company?  How often have you heard on businesses that they could have had good margins, but instead of being happy with that, instead lower their price to sell more, and in the end, succeeded in bigger sales but lower profits?

Are you pursuing growth at all costs, or do you pause first to ask first – is the company healthy?   After all, most of us are not public companies, and we have a choice.  Let’s have the confidence to believe that  when it is healthy, IT WILL GROW.

I started to write for SME Insights,  a national bi-monthly Small and Medium enterprise magazine last July 2006.  These are the series of articles I wrote for them which I am putting on here.