Short-termism is a potential danger to all the economy says new research into drinks industry
Wednesday 11 January 2012
The folly of a rush to short term profits on the stock market can have devastating implications for the wider economy says new research into the problems that affected the drinks industry in large firms across the world.
An international team of researchers, led by the University of Surrey, say the role of stock markets in mergers and acquisitions needs to be seen more critically.
Mergers and acquisitions that are based on short-term gains in terms of heightened value on the stock market sometimes lead to a long-term decrease in the value of the enterprise.
Experts in international business management studied the behaviour and fortunes of major firms in the drinks industry.
The research is based on an international comparison of four multinational corporations in the brewery industry: Two Carlsberg and Heineken originating from two so-called coordinated market economies (the Netherlands and Denmark) and have strong influences of Heineken family and Carlsberg foundation.
The other two Anheuser-Busch (A-B) and Scottish & Newcastle (S&N) originating from so-called liberal market economies (the USA and the UK). The latter two breweries do not exist anymore as independent businesses.
Mike Geppert, Professor of Comparative International Management and Organization Studies at the Surrey Business School, said: “In our study of the brewery industry, two major brewing companies (Anheuser Busch and Scottish & Newcastle) which were relative late-comers to the international beer market, decided in the period early 1990s to 2006 to pursue an aggressive, high-risk international acquisition strategy, encouraged by shareholder and market analyst expectations.
“In both cases, they ended up over-extending themselves and were eventually taken over by their competitors.
“By contrast, two family-controlled breweries (Carlsberg and Heineken) which had been operating internationally for nearly a century and were less influenced by short-term stock market interests, took a less aggressive acquisition approach over the same period, acquiring more slowly and only those breweries that they knew they could run well based on their long international experience.
“These companies are still independent and highly successful. Our conclusion is that, in some sectors, a predominance of short-term stock market considerations can actually damage the long-term value of a business. We acknowledge that this might not apply to all industrial sectors. But our main point remains: the stock market does not always create value, but rather can sometimes destroy long-term value, which in some cases might be better preserved through concentrated forms of ownership.
“The share-holder value driven acquisition strategies of S&N and A-B led to high risk managerial decisions which certainly contributed to the fall of the companies. This is especially true in the case of S&N. The case of A-B is more complex, but bad minority influence of the Busch family plus share-holder pressures led to the same result.”
The researchers found that concentrated (family/foundation) forms of ownership and lower share-holder value driven financial pressures in the home country of the multinational firms supported more sustainable and moderate managerial risk-taking profiles and strategies in the cases of Heineken and Carlsberg, which have a long history of internationalization and are quite strong players in the global brewery industry.
The research is to be published in the British Journal of Management in 2012.
