Fluid power experts and casual observers alike can’t help but notice the steady stream of mergers and acquisitions affecting our industry. For instance, over the last year we’ve seen:
- Danfoss buy Artemis Intelligent Power.
- Des-Case acquire RMF Systems.
- Festo make a deal for Fabco-Air.
- IMI purchase Bimba Manufacturing.
- Michelin take over Hallite and Fenner.
- Monnier buy Fluid Air Controls.
- Sun Hydraulics acquire Faster Group.
Granted, consolidation in the fluid power industry is nothing new. The Parker Appliance Co. acquired Hannifin Corp. in 1957. Mannesmann bought Rexroth in 1975 and merged with Bosch Automation Technology in 2001. Over the years Vickers has been part of Sperry, Libbey-Owens-Ford, Trinova and now Eaton.
On the surface acquisitions aren’t inherently good or bad. How they affect innovation depends on the underlying goal. Companies often tout vague rationales like value creation, pursuing scale and fostering synergies, when it’s all about cost cutting. A common acquisition strategy when buying a company is to slash costs to improve margins and cash flow. That’s what private-equity firms do.
On the other hand, relatively small companies with attractive products might benefit from a larger sales force and more marketing heft. Bigger companies can also offer manufacturing skills to lower costs or the technology expertise to enhance the performance of the acquired company’s products.
Forward-looking companies looking to grow can view acquisitions as new opportunities for creative collaboration and an excellent way to drive innovation. Larger firms more often have sizeable R&D budgets; smaller companies tend to be more entrepreneurial and nimble. Together, consolidation can stimulate the new organization’s focus on innovation.
But making it succeed is hard work. Acquisitions can cause disruption as business processes get integrated, redundancies are eliminated and staff reorganized. Innovation often takes a back seat. That’s especially true if two vastly different cultures clash, or the buyer issues one-way demands that ensure talented researchers and engineers walk out the door. It can also be a problem if key employees at the acquired company have received a lot of money. They don’t really need to work anymore, and it shows.
Prof. Bruno Cassiman of Spain’s IESE business school has written about M&A’s effect on innovation. In general, he said that if the two companies were competitors with the same types of products and technology, the merged company often reduced R&D costs and personnel, eliminated R&D projects and demanded faster results.
In contrast, said Cassiman, if the acquisition involved companies with complementary—but not identical—expertise, the merged company tended to expand its technology reach, made better use of resources and launched additional R&D projects. More new products entered the pipeline and the company saw higher returns on R&D investment.
Countless stories relate how a company spends millions on a rival, and then shuts down the unit and writes off the purchase price in just a few years. Various studies put the failure rate of acquisitions at between 50% and 90%. For companies to enjoy success and stay innovative post-acquisition, senior managers must take innovation seriously and continue to fund research and engineering. Higher R&D investments yield higher productivity, growth, profits and market value over the long term.