Small can be beautiful... and successful
By Mano Sabnani, Business and Financial Consultant
First published in TODAY
15-16 Mar 2003

Do mergers among companies result in better business entities, overall? This question has been raised many times and the answers from those interested or involved has never been exactly the same. The results of actual mergers has also been varied but what is consistent is what companies set out to do at the start of the merger process. This is, invariably, to exploit synergies between the businesses and thereby reduce costs and raise profitability, while strengthening the capital base.

In Singapore, the results of mergers among companies has been mixed, as is the case elsewhere. ST Engineering, the result of the amalgamation of four listed government-linked companies, is often cited as a successful local merger story. The companies and shareholders benefited in many ways and the group is touted today as a world class engineering group with varied capabilities and global reach.

On the other hand, multi-billion dollar, headline grabbing international mergers such as the AOL-Time Warner union and the PCCW-HK Telecoms combine are still labouring under various problems, even after the lapse of a few years. Profitability has declined and shareholders have been hit by shrinking values. Most must be wishing their companies had stayed the way they were.

The fact is, small companies can also be highly efficient and profitable. Their main problem, often, is scaleability due to a lack of capital. Such companies are often enticed into mergers with other entities on the promise of greater scale and reach, but leaders of such merged companies need to bear in mind the need to work hard after the merger to create world class companies. Customers must not feel they have lost out due to the disappearance of some of the independent service providers.

The hectic pace of consolidation in the local financial services industry is not completely misplaced or unwarranted. Singapore needs to prepare for more external competition and new global trends. But some customers of banks, corporate and individual, now complain of a lack of choice. Also, due to the combination of six banks into three, some companies are now being asked by the remaining banks to reduce their exposure, where previously it was acceptable.

So, having fewer, but bigger banks is not entirely a positive, at least from customer standpoint. Does Singapore really need to hasten to reduce the three local banks to two, as is the conventional wisdom? Relatively small entities can be customer-friendly and leaders in segments, as demonstrated by OCBC Bank in the home loans market. Its two bigger rivals, UOB and DBS, are still figuring out how OCBC did so well in increasing market share. Over the years, OCBC has also developed a positive, lasting relationship with its shareholders.

The message here is that Singapore should persist with a strategy of letting a hundred thousand entrepreneurial flowers bloom. Small companies will provide diversity, competitivene strength and resilience to the underlying economy. Singapore's economy is a small pond, by global standards, but prawns in such an environment can feed on other dead prawns while a large, dead Koi runs the risk of upsetting the ecology of the whole pond.

Government-owned Alexandra Hospital, where the elder of my two sons was born about 14 years ago, was small, run-down and seemingly neglected in the eighties. It remains small now but appears to be much more successful, with its focus on geriatrics, diabetes and dentistry. Best of all, the hospital and its grounds are now brighter, cleaner and greener. The hospital's management has been paying more attention to details and its execution has made a difference. Today, Alexandra is able to stand up to competition from not only public-sector restructured hospitals, but also the likes of Parkway and its private hospitals. The service gap has almost closed.

Big is not always beautiful or efficient. Size can mean more bureaucracy and too much internal politics in a large organisation can slow progress. It can also stifle entrepreneurship and speed of reaction to market changes. Large companies can also find it difficult to change direction or worse, to turn around completely. Keppel Corporation is an example of an aircraft carrier-like group which which had to metamorphosise from a holding company of various investments to a focused entity with world class core businesses. It is succeeding, but the process took time.

We all know that global development has led to some risk of extinction for large mammals such as the African elephants roaming the savannah or vast grasslands. But there is no such risk for the dung beatles that live on the same land. They are small and adaptable and are thriving. Similarly, in the corporate world, Singapore does not need to build mainly the likes of Citibanks to survive. A large number of small, nimble companies may be the way to go. Mergers and acquisitions can take their natural course. In the financial sector, local SMEs will certainly welcome the presence of three local banks instead of two.