Two Swallows do not a Summer make – more like a Gulp!

From The Times, November 1, 2007
Foundations look just too shaky at Taylor Wimpey
Nick Hasell: Tempus

A writedown on the value of a company’s overseas operations and a gloomy outlook on trading at home would not appear the best formula for one of the biggest rises in the FTSE 100.
But this is housebuilding, or more specifically, Taylor Wimpey, the worst performer this year in what has been one of the stock market’s worst-performing sectors. So with the shares down 55 per cent over the past six months, yesterday’s 6 per cent gain can be read as no more than the covering of short positions and relief that its tidings were not any worse.
Not that all was gloom. Perhaps the biggest surprise was that Taylor Wimpey, now Britain’s largest housebuilder, repeated its confidence that it can achieve operating margins of 14 per cent in the current year. Given that improving Taylor Woodrow’s historically below-par margins was one of the key reasons behind the merger with Wimpey, that affirmation is encouraging.

The Competitive Strength perspective demonstrates why Merger & Acquisition strategies need to take into account the underlying operational cultures and competences of the companies involved. There is an enormous difference between the potential capability of an "Excellent" Competitive Strength organisation to deliver performance improvement compared to that of a "Comfortable" one.

As we have commented before, the ability to deliver an improved outcome will be substantially influenced by the degree of match or mismatch of Competitive Strength level and the Changeability of each outfit. If they do not match, or if they are not vigorously and competently addressed, then nothing will change.

According to this article, the jury is out. Will Taylor Wimpey be greater or less than the sum of its parts? If we disregard the initial share price lift that appears now to be attributable to extensive financial engineering rather than performance, the outlook does not look good. When we apply a Competitive Strength perspective, it looks bad.

Using Competitive Strength criteria, we can reasonably suggest that this may have been a “Comfortable” company merging with a marginally “Constrained” business in the expectation that something stronger would emerge. With no evidence of extremely rapid internal transformation, the most probable outcome is a larger “Constrained” business rather than a “better business”. Even if at the outset Wimpey might have rated a Competitive Strength of “Excellent” and assumed that they could absorb a “Constrained” company and remain “Excellent”, this was unlikely to be the outcome. The lower common denominator tends to prevail, as we have seen in so many previous mergers, which is why their success rate is barely 50%.

We believe therefore that there were questions that were not considered much less answered. What is alarming is that the architects of this merger almost certainly did not know that these questions existed and that they needed to be answered. They applied conventional thinking and got conventional answers and it now looks like this will produce the same disappointing results as at least 50% of mergers. We believe that the Competitive Strength perspective would have highlighted the other questions that needed answers.

You may like to know more about the Competitive Strength Report and Process, the only completely independent organisational self assessment tool that rapidly provides a simple and clear health check, and helps you decide what to do about your results. Please have a look at the Competitive Strength Report web site.