What is it about the word "synergy?" It pretty much disappeared from the business lexicon after the AOL-Time Warner merger, the mother of all synergy deals, showed itself to be a disaster. But the word, or at least the idea, is all over the place again. Apparently, you can’t keep a bad word down.
A recent big example is Oshkosh Truck’s announcement in October that it would buy JLG Industries Inc. for $3 billion. The companies said they see a strategic fit, but look at their businesses. Oshkosh makes fire, military, concrete and garbage trucks. JLG makes equipment that lifts people and heavy materials several stories into the air. What do those businesses have in common?
The one example the companies cite is that Oshkosh’s fire trucks with ladders might be able to use JLG technology to lift firemen into the air faster and more safely. It’s hard to imagine that there are major improvements to be made there. We’re all for keeping firemen safe, but our bet is that the equipment already works quickly and safely. In any case, no other Oshkosh equipment needs to lift anything several stories into the air, so JLG’s core technology can’t help beyond the one type of fire truck. It’s possible the two companies can share some technology for transmissions, axles, etc., but that’s hardly enough to justify a major deal.
Oshkosh seems to be falling victim to one of the most common mistakes that can doom synergy strategies: Oshkosh is seeing synergies that don’t exist in the minds of customers. Japanese consumer electronics companies made this mistake in the late ‘80s and early ‘90s, when they decided that they would buy movie studios. The companies seized on a computer-industry analogy and decided they wanted to own “software” to run on their “hardware.” The analogy misunderstood the computer industry; while hardware and software are certainly both necessary, almost no company is a success in both parts of the industry. More importantly, the consumer electronics companies kidded themselves about how customers think. Sony, for instance, wasn’t going to be able to convince a customer to go to a movie made by Sony just because she owned a Sony TV. Nor would a customer rent a Sony video just because he owned a Sony VCR. Meanwhile, because Sony’s “hardware” people didn’t understand the peculiarities of movie business “software,” they lost their shirts. Sony bought Columbia Pictures in 1989 for $3.4 billion. In 1994, Sony took a $2.7 billion writeoff on the purchase and reported a $510 million operating loss at Columbia, meaning the value of its investment had almost entirely disappeared.
Oshkosh also seems to be making another common mistake, overestimating the value of scale. Oshkosh said the purchase will mean that the combined companies will now buy roughly $1 billion of steel a year. That is surely a big increase for Oshkosh, but the figure means Oshkosh-JLG will account for less than half of one percent of the world’s steel consumption. How much pricing power does that give Oshkosh?
Without synergies or economies of scale to justify the acquisition, Oshkosh is basically just betting that JLG is worth more than shareholders thought it was–quite a bit more, in fact; Oshkosh agreed to pay 40% more than the price of JLG stock on the date the purchase was announced. Maybe that’s a good bet. But maybe it isn’t.
Oshkosh notes that JLG will be its 15th acquisition since 1996, and companies that make frequent acquisitions can sometimes get to be good at them. What Oshkosh doesn’t note is that its acquisitive decade began right after the company made a series of divestitures to clean up problems that followed a prior string of purchases. In addition, JLG is far larger than any prior purchase by Oshkosh, so the fact that others have worked out doesn’t necessarily say much about the prospects for the JLG deal.
Sounds to us like Oshkosh may be headed for a crackup.
