Sears' holiday season was anything but as it announced sharp sales declines, shedding of locations, and reaffirmation that the Kmart acquisition was a disaster. Sears is not alone; it is merely a recent example of a failing company that reaches for a lifeline by partnering with another struggling one. Why do companies repeatedly attempt this doomed strategy? Isn't it better to try to fix your own woes instead of inheriting new ones?
It is not uncommon for large companies that lost their way to make a strong comeback. Everyone knows the story of the resurrection of Apple and Jobs 2.0; some, like IBM, diversified their way to higher growth businesses; others like Ford kept large cash reserves to protect itself from a market downturn. Successful restructurings often require significant pain in terms of job losses, structural changes, and bets into new areas. Strong management teams and sound strategy are the keys to navigating turbulent waters.
But a successful playbook never included a buyout of the weakest competitor. No matter how cheap it is. Companies often try it because its the easiest (or sometimes only) option. Cut costs, raise prices, and hope things work out. The Nextel deal put Sprint on a fast track to brinkdom. Struggling railroaders in the 1960s were unsuccessful. Remember Alcatel and Lucent? Even dotcoms like Lycos rolled the dice and lost. There are hundreds of examples across an array of industries that have tried and failed.
You can't fix a broken business model by adding more of the same. Sure cost cuts can help, but surely you can do that on your own as many have done. Ford, for example, initiated tremendous cuts (and yielded concessions from union on the heels of its struggling competitors) while revamping its focus to smaller cars. A large scale integration in a time of crisis leads to a misallocation of resources, a myopic focus on cost savings, and an opportunity for competition to steal customers and strengthen their market position. The Japanese auto companies did so during the Daimler/Chrysler fiasco; Southwest significantly increased share during the airline consolidation of the 1980s. These companies had viable business models to begin with - a key ingredient that cost cutting along cannot solve.
So will Sirius and XM work ? Given all the deal talk surrounding Yahoo these days, will a combination with AOL allow it to compete with Google ? Borders + Barnes would have been a disaster. If history shows us anything, an announced merger of two subpar rivals might be a leading indicator to head for the exits. Generally speaking, at that point, it might already be too late.