Business Case and Hypotheses – Science and Beliefs

Literature on mergers and acquisitions tells us that M&A is all about growth, either by gaining clout, entering new markets, new channels, new product lines, acquiring know-how, licences, intellectual property, or a combination of the above.  In spite of all the rigour, methodology and risk mitigation that go into choosing the right candidate for a merger or acquisition, some of the assumptions underlying the business case will always remain an act of faith.  My view of the future is unlikely to be identical to yours.

At a corporate level, we see the likely end-result of such gaps between expectations and reality in the acquisition of SANYO by PANASONIC as recently as 2009 (late 2008 to be precise).

Shall I drown you – or do we both die together ?

Panasonic, for whom Sanyo was a rival in many segments of consumer entertainment electronics such as video cameras and sound systems, was expecting to gain significant market share by acquiring that household brand, and more specifically to enter the lithium ion batteries and solar panel markets which they believed to have brilliant future with the emergence of portable electronic devices and growing focus on renewable energy.

Only four years later, with the powerful but rather unhelpful benefit of hindsight, we can contemplate the extent to which Panasonic’s underlying hypotheses turned out to be wrong.  The combined impacts of a strong yen, a slump in the sale of digital appliances after the amazing year-on-year growth fuelled by smart-phones, strong competition from Korea in the lithium ion batteries industry and China churning out solar panels almost at the speed of the solar rays with will capture, Panasonic finds itself today having acquired a sinking ship.  The Japanese government may be driving a policy aimed at reducing the value of the yen, but it would require far more to put Sanyo on a firm footing on the global market.

Whereas it would in the past have taken many years, possibly a couple of decades, for a large industrial conglomerate to decline and disappear from the market’s radar screen, we now see the extent to which the cycles of corporate growth or decline have accelerated.  The acquisition target which seemed so attractive only four years ago is now a burden.  Panasonic plan to cut 90% of Sanyo’s global workforce over the next three years: with that kind of pruning, it is likely the Sanyo name will disappear altogether.

Since the ill-fated acquisition of 2009, Panasonic has already attempted to refocus and simplify its business by selling all its non-Japan and China white-goods operations to Haier of China.  The divisions producing domestic electrical appliances are to be sold to Whirlpool.  The once almighty Sanyo corporation is being sold bit by bit, just as one deconstructs a castle made of Lego.

What was thought to be a great business case initially has turned out to be a nightmare for Panasonic’s leadership.  The business case built in 2008 and due diligence based on the “as is” valuation evidently failed to consider the robustness of the underlying assumptions regarding future growth, competitor activity and the evolution of the global economy.

And so as the two brands struggle to keep their heads above the water, it seems that one of them will push the other below the water-line to remain above the surface. I wonder what the Sanyo’s founder Toshio Iue, who at one point through family ties had come close to joining the lead at Matsushita, would think today of the epilogue of his legacy.

Not a brilliant story, but definitely one from which learnings need to be captured.