Tuesday, July 5, 2011

Pearson's Lapse in Concentration

Large corporations are always on the look out for acquisitions. In mature markets, when organic growth is hard to come by, and cash reserves need to be put to productive use, the attractions of acquiring another business and integrating it into current operations are easy to see and make so much commercial sense. 

There are dangers, however. Acquisitions can be strategic and even brilliant - the right business purchased at precisely the right time and for the right price. 

They can also be dumb. 

Pearson Australia's purchase of REDgroup Retail's online business fits snugly into the latter category. This is precisely the sort of acquisition that seasoned managements usually know to avoid like the plague. They are opportunistic - the businesses have just become available, are crying out to be picked up, and are undoubtedly cheap as chips - but they are foreign to normal and well understood operations, and current management has no experience or appreciation of the subtle dynamics that need to be known and respected for them to be successful.

Executives have to guard against the sort of emotional self-pleasuring that successful acquisitions bring. When announced, the press is quoting you, the industry is abuzz and admiring your cleverness, you've got a jump on the competition. Hard to psychologically resist.  

No doubt Pearson assessed this acquisition carefully. A good Australian-based operation, with an excellent Kobo partnership, growing strongly, a loyal customer base, needed by publishers, etc. It would be a shame if it disappeared just because its parent got into difficulty. Revenues now might be only $25 million or so but could well be $100 million in five years time. Penguin, in fact all Australian publishers, just can't sit by and see this business disappear. There has to be strong, vigorous and well-funded, local competition to the off-shore powerhouse, Amazon.

All superficially plausible, but the negatives are overwhelming. Pearson is a publisher, not a retailer, and no publisher understands, or has the skills to manage, specialist book retail operations. They are totally different beasts. They require careful attention, love and continued investment, all the sorts of things that REDgroup didn't bring to the table. As well, retailers have secrets. They know things about other publishers that no individual publisher should be privy to - things like trading terms, promotional deals, forward publishing plans, strategic intentions, etc. It's no use Pearson vowing to run the business 'as a separate entity'. Other publishers will be deeply suspicious, and seek alternatives. 

No doubt Dymocks and other retailers passed a ruler over this business and walked away. The demise of REDgroup's online outfit would not at all have meant that the local industry would have been  denied this growth opportunity. It would've simply been spread around.