Survival strategy: Acquire and divest aggressively

Our eFE Bureau

New Delhi, Dec 9: Change is the name of the game in the marketplace today and companies, especially those operating in the hi-tech space, have to be aggressive in acquiring and divesting businesses if they are to survive, according to McKinsey & Company Inc managing director Rajat Gupta.

Delivering the keynote at the Asian Oceanian Computing Industry Organisation (ASOCIO) general assembly, Mr Gupta said that only four of the top ten high tech players in 1990 remained in the top 10 in 2000.

To sustain a winning position over time, companies have to be ready to transform their business mix dramatically.

Citing the example of IBM, he said that the predominantly hardware company, with 57 per cent of revenues from hardware and 9 per cent from services in 1994, moved aggressively into software and services, which accounted for 51 per cent of the company’s revenues in 2000.

He also said that companies needed to be belligerent in acquiring companies, even during a downturn when assets are undervalued, and also be brutal about divesting businesses. Terming the whole process of change as “creative destruction,” he said mergers, acquisitions and spinoffs are all critical at different stages of development of a company.

“For instance, between 1996 and 2000, surviving companies in hi-tech did 13 times as many acquisitions as the average hi-tech
company. On the other hand, surviving winners in high-tech recorded 7 times as many divestitures as the average hi-tech company,” he said.

Winners such as IBM, Intel and Cisco significantly do more acquisitions than average.

Mr Gupta also said that the average life of a company has been spiralling downwards.

From an average tenure of 90 years in 1935, a company’s life was down to 20 years in 1995 and this is expected to decline further to 15 years by 2005.