Consolidation is the buzzword now. Be it banking where the first move came from the leader SBI or insurance where HDFC life has moved to form a strong number two player, companies are moving to grow inorganically. The circumstances under which inorganic growth happens all around us must be well understood. Growth is at its slowest. Earnings are stagnant or falling. Under these circumstances, managements of weaker players will be more willing to negotiate and proactively reach deals. The heat on their earnings is getting the better of them. For larger players, this is the best time to consolidate using their size as a bait for smaller players. By growing size now, they will set the stage for growing earnings later. The consolidation fever will soon spread as consolidation happens across industries. When consolidation happens really matters. In times when the economy is sluggish and companies seek to combine to gain scale and cost benefits, it will significantly help earnings growth later. Companies are consciously creating room for future earnings growth and consolidation is an effective strategy. SBI & HDFC life have set off the race while others will experience a greater sense of urgency. Today’s moves will be good for tomorrow’s earnings. It is a good sign that several companies have decided to take tough decisions. With more companies taking the plunge, the stage would be set for improving earnings through proactive post-merger restructuring. When growth returns, earnings will have just the tailwind that the markets badly yearn for. That day may not be very far from now.
In stocks as in romance, ease of divorce is not a sound basis for commitment.” – Philip Fisher