Mergers: The Market Share

Sainsbury's bid for Asda is perhaps naïve in its optimism

You would have thought the Morrisons deal for Safeway more than 10 years ago would have put paid to analysts and investors wanting another supermarket bid. It caused massive upheaval in systems, in logistics, in stock - indeed, there was almost nothing which was not disrupted. The disruption even applied to the company's eponymous founder, Ken Morrison, who was eventually forced to step down. The combined group took five years to right itself.

It is true that some things Morrisons brought about themselves. Much of what was good in Safeway was unceremoniously binned. They then spent several years trying to make things work and, when they did not, had to reinvent the old processes. Essentially, it was just too big.

Sainsbury's bid for Asda may be a different story, but it has a lot of similarities. Sainsbury's has predominantly focused on the south; Asda is headquartered in the north. Sainsbury's is historically upmarket; Asda is historically more downmarket. Sainsbury's was predominantly food, whereas Asda used half its space for clothing - although here, Sainsbury's has diversified. It had to: food at Asda is much cheaper because of the higher mark-up of non-food. Above all, the combined business is truly vast.

Some executives have worked in both companies and think it will be easy to integrate the operations; the foot soldiers, who have more in common with the everyday shopper, have doubts. Sainsbury's had taken over Argos, the home shopping business, relatively easily and it may have given them a thirst for more, but Asda is a whole different game.

Many businesses fail on mergers. When they succeed, it is because the target is small, the integration is straightforward, the acquisition close at hand and nothing is done to harm the culture of the acquiring firm.Sainsbury's has not needed to question itself so far because its acquisitions were small. However, by taking on Asda, which is effectively the same size, the culture is unlikely to remain unscathed.

"When mergers succeed, it is because the target is small, the integration is straightforward, the acquisition close at hand and nothing is done to harm the culture of the acquiring firm" This is where the governance needs to come in. The non-executive directors could have challenged the executives and put a stop to it, raising concerns about the size, the culture, Sainsbury's own falling market share and said it was too much to...

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