Peter Drucker (1909-2005) was arguably the most influential management scientist who ever lived. He was the author of some seminal books on management such as Practice of Management (1954), Managing by Results (1964), The Effective Executive (1967), and The Age of Discontinuity (1969). Forbes magazine labeled Drucker as the “Einstein of Management.”
In 1981-82, Drucker articulated his Six Rules of Mergers and Acquisitions. We shall look at each of these six rules and evaluate the proposed Star-Crown merger according to these rules.
Peter Drucker’s six rules
- The successful acquisition must be based on business strategy, not financial strategy.
- The successful acquisition must be based on what the acquirer contributes to the acquisition.
- The two entities must share a common core of unity, such as markets and marketing, or technology, or core competencies.
- The acquirer must respect the business, products, and customers of the acquired company, as well as its values.
- The acquirer must be prepared to provide top management to the acquired business within a fairly short period, a year at most.
- The successful acquisition must rapidly create visible opportunities for advancement for both the people in the acquiring business and people in the acquired business.
Rule 1: According to Drucker, a successful merger or acquisition should be based on a sound business plan, not mere financial analysis. All information that has been disclosed in the Star-Crown merger thus far has been assessed solely from a financial viewpoint. Recall Harrah‘s largest single expansion in 2005, when it acquired Caesars Entertainment, Inc. for $10.4 billion. While the merger probably made financial sense, the marketing and operating strategies of the two companies were far too divergent to be placed under single ownership. Harrah’s operating model was based on the slicing and dicing of data whereas Caesars strategy was based on product differentiation. The acquisition resulted in huge debt for Harrah’s, forcing the company into bankruptcy.
Rule 2: The attractiveness of a merger or acquisition, according to Drucker’s second rule, needs to be assessed along what the company suggesting the merger will contribute to the company being acquired. The Star Entertainment Group, if merged with Crown, would add the new markets of Queensland (Gold Coast and Brisbane) and Sydney to regional monopolies of the resulting behemoth, making it the undisputed market leader on the Australian casino scene. Apart from scale, there is little that The Star could contribute to the merged entity.
Rule 3: Successful mergers or acquisitions, like all alliances, must have a common core of unity. Such unity could be found in markets, technology, or culture. Of these three factors, cultural unity is most significant. Over 80 percent of mergers fail to achieve their objectives, and culture is often a contributing factor to most of these failures. Addressing the issue of culture in alliances, Mitchell Marks and Philip Mirvis, experts in organizational culture, write, “On the human side, studies document how cultural differences can give rise to ethnocentrism, stereotyping, and the belittling of counterparts between members of combining top management teams.” Culture at The Star could not be more different from culture at Crown. James Packer’s loathing for The Star and the way the company operates is well known and well documented. Given this inevitable culture-clash, it is hard to see how the two companies can form a successful union.
Rule 4: In discussing the third rule, we mentioned the disdain Crown’s major shareholder—James Packer—has for The Star. The fourth rule holds the acquirer needs to respect the products, customers and core values of its target. The two companies operate at different levels of customer centricity. The Star has been on a binge of cost-cutting and slashing headcount. Crown Resorts is largely about offering a premium product. These fundamental differences in business orientation make it highly unlikely for the two companies to have mutual respect for each other’s values.
Rule 5: Should the merger between The Star and Crown Resorts go ahead, The Star should be ready to replace a significant portion of current executives at Crown Resorts, according to Drucker’s fifth rule. Capable executives at Crown who do not hold their counterparts at The Star in high regard may want to quit and seek their fortunes in places such as New Zealand, Macau, the Philippines, or Vietnam. Does The Star have a ready supply of high-level executives to fill these spots? Based on the current talent pool at The Star, such a scenario seems extremely unlikely.
Rule 6: Drucker’s last rule says that the merger should create opportunities for advancement across lines. If basic synergy across the two organizations is lacking, an “us versus them” mentality is bound to develop among employees of the former organizations. Sometimes it can take a whole generation before these invisible but distinct identities are merged. It is therefore imperative that, within the first few months after the acquisition, several executives on both sides are promoted to a better job across the lines. This way both sides see the acquisition as an opportunity for professional advancement. Should the Star-Crown merger go ahead, an exchange of executives at various properties of the combined organization would be paramount to the success of the merged organization.
So, would the merger of The Star and Crown resorts be a success? If Peter Drucker’s six rules are applied as the acid test for likely success, the chances of a happy union appear slim. But not all mergers have to meet all six criteria to be a successful union. The six rules aside, reservations on the part of the Australian Competition and Consumer Commission (ACCC) could also be a huge barrier to the merger going ahead.
Furthermore, a merged Crown-Star juggernaut would effectively reduce the bargaining power of individual Australian states in offering or renewing casino licenses. Finally, the interests of the ordinary casino customer also need to be considered. The currently prevailing regional monopoly in Australia has resulted in a dearth of customer-orientation on the part of Australian casino companies (more evident at The Star than at Crown Resorts). A combined Star-Crown entity may further feed management hubris at the cost of the customer experience and player reinvestment. I believe that the casino industry in Australia requires more—not less-competition if the interests of the customer are to be served.
*Sudhir H. Kalé, Ph.D. is Founder and CEO of GamePlan Consultants, a boutique consulting company that has advised casino clients on five continents. He has written around 150 articles on the marketing and management of casinos. Sudhir has followed the Australian casino industry very closely for over 25 years. You can write to him at [email protected].