As more services and facilities providers look to merge, Will Strauss looks at the plus points and potential drawbacks of 'joining forces' with another company.

Over the last few years, company mergers and acquisitions have been rife within the television and media sector.

Many broadcasters and production companies have joined forces, changing the shape of the market and, as a result, some facilities and services providers have followed suit.

Nicola Brittain has written an interesting piece on it this week, looking specifically at post production. Have a read.

She makes some salient points. But I wanted to add a few of my own comments.

To my mind most of the mergers have been done for the following reasons:

  • to mirror - and therefore be able to service the demands of - the broadcasters and producers.

  • to achieve economies of scale.

  • to reach new markets.

  • to add new products/technology/services.

  • to escape a financial hole.

The one that interests me most is the idea of scale.

Facilities companies (OB, post, hire etc) have grown out of all proportion over the last five years. The cottage industry has been replaced, in part, by serious sized businesses. And those companies that don't either fit into a) boutique, niche and specialist on the one hand or b) big, efficient and fast on the other, have suffered.

Two further mergers are in the pipeline this week. One involves two post houses. The other involves the outside broadcast market.

This ‘joining of forces' will allow these newly merged companies to compete for larger projects, widen the sales net and achieve economies of scale.

But, in a world where lots of mergers fail, is it the right thing to do? Is organic growth or external investment a better option?

According to economics, an economy of scale is:

  • The increase in efficiency of production as the number of goods [or in this case services] being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. When more units of a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale (ES) are said to be achieved. The more that is sold, the less the cost to the company.

So, for a post house that ‘expands' to take on board another complimentary company, that could mean being able to offer more suites, more creatives and more locations but pay out less for admin or sales staff, reducing the marketing budget and, if a company mergers and loses a building, then saving on the costs of rent/mortgage. And so on.

But some of those benefits can also be achieved through company growth.

There are down sides to mergers.

Economies of scale gives big companies access to a larger market by allowing them to operate with greater geographical and market reach. However, for the small to medium enterprises (SMEs) size does have its limits. After a point, an increase in output actually causes an increase in production costs or ‘diseconomies of scale"

As an example, a small company may suddenly have to distribute its goods and services in progressively more dispersed areas - and that could require more staff, more locations and more expertise. All of which costs money.

But, the bottom line is that in a lot of cases, the cost savings simply don't materials, and neither do the increased sales. Just look at AOL Time Warner.

According to Business Link these are the five potential pitfalls of mergers and acquisitions:

  • the target business does not do as well as expected

  • the costs you expected to save do not materialise

  • key people leave

  • the business cultures are not compatible

  • resources being diverted from your business' main aims

A merger can be a way out of a hole. But, if market conditions change before the consolidation process is complete, if the merger of the ‘brands' is not handled carefully, if those savings or increased sales don't materialise, there is the potential for a merged company be in worse shape than before.

It's a tough call. And it's one that a lot of companies in the service sector will be making. I hope they get it right.

Got an opinion on mergers? Have your say below.