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| © Slangford3035 | Dreamstime.com - Albert Einstein, Physicist Photo |
By Paul Leyland, Founding Partner, Regulus Partners
“If I knew what it was that we were doing, it would not be called research...” Albert Einstein
The gambling industry is becoming
an increasingly complex and expensive one in which to operate. In land-based
sectors, software and service-culture is replacing hardware and transactions.
In remote, the pace of regulatory and technological change has never been
faster. Customers are expecting more, while suppliers are being squeezed in an
effort to share the burden and maximise returns. Across sectors and
jurisdictions, all operators keep a wary eye on politicians, the regulator and
the tax man.
There is an obvious (and
sometimes effective) response to these trends: consolidation. Bwin joined with
Party; Scientific Games bought WMS and Bally; GTECH acquired IGT; Amaya and
Intertain have been highly acquisitive; and, now Ladbrokes is looking to merge
with Coral. Between them these deals
represent c. US$22bn (£14bn) of assets (potentially) changing hands.
With the Canadian-listed businesses
the exception, a (the?) key reason for these deals is the capacity to deliver operating
synergies. The list is common to all M&A: consolidating to one set of head
office costs; combining central functions; stream-lining operations; increasing
buying-power; cutting waste.
All of these things are good for
the bottom-line and, if well executed (a big if), can also be good for the
company and its customers. But cost synergies are a one-off and they often cost
money to achieve (deal costs, finance costs, redundancies, contract
renegotiations etc). They buy larger pre-exceptional profit, which markets
like, and they buy time to adapt to changing situations, if used wisely
(another big if).
I would flag two issues which concerns
me about this direction of travel.
First, no-one likes to be a
synergy. Deals cause huge disruption to businesses: from management time, to
operating structures, to changing loyalties and motivations, to grass-roots
morale. This disruption is often poorly understood by markets (it is hard to
model in a spreadsheet) and often de-prioritized from a human perspective by
senior management, which suddenly have a lot more ‘tangible’ issues to deal
with. Given these pressures, M&A requires extremely high calibre management
with a thoroughly thought through and well communicated plan, along with a
competent and loyal core team.
Otherwise, all the cost cutting and reorganisation will simply undermine
long-term productivity and growth, leaving the whole worse off than the
historical parts.
Second, cutting costs does not
grow markets. Competition can grow markets. Innovation can grow markets. The
two tend to be linked. Increasingly, customers have a wide choice of “brands”,
but with a highly homogenised offer underneath (land-based and remote).
Equally, operators have a very narrow range of large suppliers to choose from
in each major product set. This is good for the short-term profits of the
sector, but it is not good for growth. And in an environment where underlying
costs are only going one way (tax, technology, regulation, upskilling), what is
not good for growth is not good for long-term profitability.
To be a healthy sector,
supporting growth and favourable regulation, the gambling sector needs to
innovate. To do that successfully it must do six things that it has been
historically poor at:
- Be prepared to spend money without the certainty of a return (or it isn’t real R&D)
- Be prepared to try things that may disrupt the status quo (even in a controlled way)
- Create proper test conditions and plan to learn (science, not hope and politics)
- Accept that the cumulative impact of small change can be just as powerful (if not more so) than searching for a silver bullet.
- Do not be afraid of failure: in the longer run failure is a lot more instructive to strategy than success (luck runs out far faster than relevant experience)
- Ensure the regulator and wider public is as behind the growth potential as possible (communicating, demonstrably acting responsibly)
All of these things are hard to
do in a tough trading environment and within an ‘operator’ culture. However,
such an environment simply makes growth and productivity more important. It is
also much harder to do when the teams being relied upon are in constant fear of
‘big change’: equity markets might be motivated by synergies, people are not…
