Corporate Consolidation and IT

In case you haven’t noticed, there has been a lot of companies buying each other. There are a lot of reasons for this, low interest rates, SOX, exchange rules, etc. One other reason for the high level of consolidation is thanks to IT systems. Combining the resources of two companies may make sense from a bottom line, but I doubt this could be done at the scale we see today without IT systems to help facilitate.

(If you want to read more on corporate consolidation here is a good article)

On My Radar: The Causes and Consequences of Fewer U.S. Equities

 

IT & Corporate Scale

In nature, when an organism gets larger, it takes on more complexity. Some organizations fit small niches where they have advantages by being simple (single cell organisms), well others benefit from a very complex arrangements of interdependent groups of cells. Companies work on similar principles, some work best when small (restaurants), well others require a massive organization of people, capital and geography to be successful (automotive industry).

Much like animals, companies need a connective tissue to organize their various functions, people and locations. In nature it is the nervous system, in the corporate world it is IT systems.

Then & Now

Lets take the example of calculating profit for an enterprise. Executives must collect information about expenses, sales, assets, taxation, etc to come to a final number. This information may be spread across hundreds of employees, datasets and multiple locations. Without IT systems this may be done by creating paper based book keeping, invoices, etc, collecting them all and sending them to a head office to make sense of and produce one final report. Obviously this would require significant manpower and time. In this system, you can imagine that a company can only grow so much before the administrative burden would diminish any real grow in the company.

Now fast forward this system to the modern day. Computers can handle much of the administrative work that would require large teams of people to do. Invoices created and paid automatically by computers, balance sheets generated in real time, forecasting done in seconds and more. If you want to grow your business you just need to modify your systems.

Buying a business just means integrating their systems with yours. Personal changes are inevitable, but taking two payroll departments and combining their efforts is more of a systems challenge now, rather than a people issue. Due diligence is a lot simpler as more data is available, and in the future will likely be done mostly automatically. In the end buying a company is a lot simpler and costs much less than in the past.

M&A In The Future

Companies generally buy other companies in order to grow, enter new markets or stifle competitors. What you end up with is people, processes, locations and IT systems. For Walmart to buy Target, that would mean a lot of people and places. What about when Facebook bought Instagram? They really bought a IT system for images and video. The developers were valuable, but it wasn’t like they got 1000 new employees. This is really a sneak peak at most future M&A deals, it will be about systems!

Conclusion

We are really seeing a big change in the corporate world. The world may very well look like a dystopian scifi novel, where only a few massive corporations exist. Computers may be a means of disruption, but they are also a means to consolidation.

 

Leave a Reply

Your email address will not be published. Required fields are marked *