Merger Mania: Will Consolidation Stifle Innovation?


Harold Sirkin, Contributor

January 25, 2016

When economic historians look back at 2015, the big story probably won’t be the Fed’s modest interest-rate hike, which was certainly the most anticipated economic event of the year. Everybody knew it was coming and it did.

No, the big story may be the wave of mega-mergers and acquisitions announced during 2015. The list includes chemical giants, global beer titans, U.S. health insurance leaders, telecom biggies, and aerospace giants, among others.

These and other mergers – which are still largely works in progress – will receive plenty of scrutiny from interest groups, the media, and government regulators, all of whom will focus primarily on how the proposed mergers will affect competition, prices, and jobs. These are all legitimate concerns.

When one or two giant companies dominate an industry, everybody else is more or less at their mercy. That concern triggered passage of the Sherman Antitrust Act in 1890 and the Clayton Antitrust Act 24 years later, which specifically gave Washington authority to intercede in mergers and acquisitions deemed to be anti-competitive.

Stating this doesn’t mean I’m anti-consolidation by any means. Anything but. In my 35-year career at BCG, I’ve helped midwife quite a few deals, sometimes as an active player or adviser and other times behind the scenes – as the proverbial fly on the wall – whispering concerns to one party or another as details are hammered out.

What’s been nagging at me lately is another concern that’s discussed mostly in academic circles: the effect of consolidation on innovation.

It’s important to understand what typically happens when two large companies – perhaps competitors in the past – get hitched.

First, the obvious: They will try to merge cultures (not always an easy task) and seek operational savings through synergies and by reducing overhead and eliminating redundancies, ranging from factories and distribution centers to unneeded layers of management. They lower their costs, but while the whole gets larger, certain pieces may get smaller – or disappear entirely.


Another thing that may disappear as a result of consolidation is an entire product line. This product line might account for a small percentage of company’s A’s business, but enough to justify its continued existence: a special agricultural chemical, for example. When company A and company B become one, it may become a minuscule percentage of the combined company’s portfolio, however – not enough for company AB to bother with. So it becomes expendable.

What you often won’t hear discussed is the effect consolidation might have on future innovation because it’s hard to predict. The academic literature and the experts appear to be divided on whether larger companies with huge R&D budgets or smaller companies that are faster and more nimble are the better innovators.

This conflict can be seen in a 2011 Progressive Policy Institute paper by Michael Mandel, a senior fellow at the Wharton School’s Mack Institute for Innovation Management (then known as the Mack Center for Technological Innovation).

Mandel takes the position that size appears to be “a plus for innovation … not a minus,” although he’s careful to point out that there’s also not a lot of “compelling evidence” that bigger is better.

Others lean in the other direction. Company size matters, but it’s the smaller, more agile companies that would appear to have the innovation advantage, they suggest.

Will consolidation slow down or stifle innovation? If size were the only variable, the best way to approach this question would be to see who the top innovators are. Are they mostly start-ups or corporate giants?

In the final analysis, the key to successful innovation is not necessarily the size of the companies doing the innovating or the number of people who share the innovation portfolio. Instead, success in innovation is more akin to a military campaign. What really counts is how the talent and resources are organized and deployed.

As my colleagues wrote in BCG’s Most Innovative Companies 2015 report: “Experts debate the benefits of centralized versus decentralized innovation organizations … but what’s most important is to have dedicated capacity. If innovation is 10% of 100 people’s responsibility, you can guarantee that little innovation will take place. But if it’s 100% of 10 peoples’ job, things will start to happen. Speed is partly born of the priority that is put on an objective, so assigning – and incentivizing — a dedicated team (what they call “committed muscle”) with the job of moving fast is an essential organizational move.”


Size, speed, committed muscle – which among them is the key lever we can debate forever. In my view, they’re all important. Consolidation might stimulate innovation if it increases an organization’s focus on innovation or brings more committed muscle to the job. If not, size alone – the simple act of bulking up – could be an impediment. Innovation often requires speed. Large organizations don’t change course quickly.

This article was written by Harold Sirkin from Forbes and was legally licensed through the NewsCred publisher network.

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