Why major players need to merge

Citation

(2001), "Why major players need to merge", Facilities, Vol. 19 No. 11/12. https://doi.org/10.1108/f.2001.06919kab.002

Why major players need to merge

Why major players need to mergeKeywords: Costs, Profitability, Strategic alliances

What if your company's costs were increasing and profits were falling? A new study by financial analysts, Plimsoll Publishing, has revealed that as many as 45 of the top 250 Property major players in the UK are now facing this strategic dilemma.

Strategic dilemma

The study looked at the ability of a company to spend wisely and generate a profitable return. It revealed a wide variation in successful spending. With an ever-increasing cost burden as many as 30 major players may be forced out of the market (see Table I).

Overall, 77 per cent of the major players had costs increase last year by 22 per cent on average, yet only half managed to increase profits. Are companies working harder to hang on to profit? How can companies fight against these rising costs? The alternatives are surprisingly few.

Table I Key findings

The Retreaters – 20 companies with falling profits and falling costs

Arguably reducing costs is a sensible strategy against level or declining profits. Of the 65 companies making less profit, only 20 companies managed to reduce costs last year, indicating that this is not a strategy favoured by the major players. Their margin only moved slightly, despite costs reducing by 14.6’per cent.

The Spenders – 45 companies with falling profits, rising costs

Of the top 250 major players, 65 made less profit last year. For 45 of these, their costs went up. They did not successfully spend this money. For some, this is the second year of rising costs and declining profitability. Their average margin, in fact, fell from 12.3 per cent to 5.6 per cent in the latest year, yet costs increased by 24.0 per cent.

The Thrifties – 12 companies with increasing profits and falling costs

Only 12 of the major players successfully improved profits whilst reducing costs. Keeping or reducing costs is proving an almost impossible strategy to maintain.

The Ambitious – 62 companies with increasing profits and costs

Spending more then seems an inevitable strategy. A total of 107 of the majors increased costs last year by 22 per cent on average. Yet only 62 of these increased spending wisely and made more profit. This lifted pre-tax margins on average from 8.6 per cent to 11.0 per cent.

Strategic options

For the 65 major players suffering an erosion of profitability arguably their options are limited, especially if cash and time are running out. Currently, 30 of these companies are in high financial risk. A way forward needs to be developed:

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  Push costs and sales up and go for profits. The risk associated with this approach is high and the level of cost growth is considerable.

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  Reduce costs and sales and go for profits. This is arguably only a short-term strategy but for some it is their only alternative.

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  Sell the company. Not a strategy that many will favour; yet some will need to seriously consider.

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  Buy a company. This must be seen as a serious option. A review of the alternatives should be considered.

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  Close the company down. Some of the players are heading this way, suffering serious losses and weakening balance-sheets, and for some time is running out.

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  Seek an alliance. Probably the most favoured alternative, as it has the greatest potential for the smallest cost, assuming that agreements can be forthcoming.

Independence in jeopardy

Plimsoll's study concludes that, if you allow your cost base to rise above your competitors', your company is at a strategic disadvantage. As major players look for extra market share to afford these increases in overheads and, in particular, salaries, then there is a real need for many of them to merge, be taken over or seek alliances.

The new publication from Plimsoll Publishing, The UK Property Major Player Strategic Options Analysis, includes the top 250 players in the industry, analysing performance over the last four years. For more details ring Plimsoll on +44 01642 257800 or visit www.plimsoll.co.uk/majorplayers.htm