/ 6 February 1998

Bigger may be better, but choice is best

Madelaine Wackernagel : Taking Stock

Amazing how the pendulum swings. In the 1980s, the trend in business thinking was “the broader, the better”. This resulted in companies adding on, seemingly indisicriminately, diversifying all over the show. But then, with the help of the 1989 stock-market shake-out, came a new idea. Concentrate on core businesses; managing everything from cookies to construction under one roof was proving to be a bit of a trial.

Thus, companies such as Hanson, which was famous for its agglomeration on both sides of the Atlantic, took the plunge, off- loading extraneous divisions left, right and centre. Other leading multinationals followed suit.

But now, it seems, it is not enough just to be bigger in one core industry: only the biggest will survive. Thanks to globalisation, competitive forces are evident everywhere, which explains why SmithKline Beecham would want to link up with Glaxo-Wellcome. The pharmaceuticals market is a very fragmented one; governments in Europe and the United States are rethinking their health policies, with cost-cutting inevitable; and generics are the way of the future, depriving drug companies of their profitable patents. So it makes sense, in business terms if not for the poor employees, for two giants to hook up, presenting a significant force with 8% of the world market.

When Glaxo merged with Wellcome in 1995, 8 000 jobs were lost and research labs and factories closed down. This time, the pain will be even greater. Neither company is putting a figure on it, but according to educated guesses, 15 000 people will be out of work as a result. That’s a hard one to swallow.

And for all the raving about cost savings, synergies and bigger research and development budgets — the stock market greeted the news with a feeding frenzy, pushing the Footsie in London to new highs — there are concerns that the benefits will be short-lived.

The head of French pharmaceuticals firm, Rhône-Poulenc, Jean-René Fourtou, recently warned that mergers would boost profits only for two years while costs were being cut. Thereafter, the new company would be thrown back once again to R&D to create new products. The two companies boast a combined R&D budget of almost £2-billion a year, but it may not be enough to ensure new products are churned out at a rate to keep pace with past levels of growth.

Healthcare is not the only industry undergoing significant upheavals. Financial services is another. Last year, a record $107-billion worth of financial mergers were announced in Europe, and more are on the cards this year.

In our own market, Aflife is gunning for Norwich, and RMB is having talks with Saflife, which in turn owns 22,2% of First National Bank (FNB). The argument is, once again, competitiveness. While it’s still early days, the local financial services industry is positioning itself to take on the world.

A bit far-fetched, perhaps? It’s hard to imagine why anyone would plump for FNB over Chase Manhattan while in New York. But all it takes is time — and with the growing threat of foreign invaders, South Africa’s banks will have to shape up.

The trend, it seems, is unstoppable. “Large and lean” is the new mantra of management gurus, as the forces of economies of scale gain ascendancy. If revenues can’t be increased, cut costs instead.

But there are other issues of competition that must be considered. For instance, in the corporate world, only six accountancy firms count, because reputation has become a significant barrier to entry. Now, with only four big groups left after the proposed mergers between KPMG and Ernst & Young, as well as Price Waterhouse and Coopers & Lybrand, competition has undoubtedly been stifled. The consumer may pay a lower price but for less choice.

Back home, the tendency towards big is best is only too familiar — the stock exchange is dominated by five groups and the last thing we need is a greater concentration of power. But by making its hostile bid — in itself a refreshing change — Aflife may yet succeed in the first step to unravelling South Africa’s tight corporate structure. What we need is more, not less, choice, for shareholders and consumers alike.