Imperial Overstretch and the Danger for (Family) Conglomerates
In his book “The Rise and Fall of Great Powers” the historian Paul Kennedy explains the growth and downfall of great empires. He uses the term “imperial overstretch” as a metaphor. In short: an empire grows to power because of trade and technological inventions. The new wealth is being used to raise an army (or a fleet) that engages in territorial expansion. The empire needs to raise heavy taxes and toll in order to finance the wars. However trade flows will change in time and because of new innovations of rival states the empire loses its dominant economic and military position. Other nations rise to glory and the empire loses its conquered territories. This process over imperial overstretch took place in many great empires such as The Seven Provinces, The British, The French, The Portugese and The Habsburg Empires. In the 20th century we have seen the same process in the former USSR and in the United States.
In our age we do not fight for territory but for market share, for talented employees and for customer preferences. Imperial overstretch still exists. We have seen companies growing fast because of acquisitions, often using a lot of debt. After a while the acquisitions do not seem to prosper anymore and the core business has suffered because of neglect. What’s left is a vulnerable giant without direction burdened with debt.
Imperial Overstretch in the Dutch Market
In the Dutch market we have seen some painful examples of economic imperial overstretch. Giant companies like Ogem, RSV, Imtech, Blokker Holding and Vendex all have failed. Huge conglomerates with little spine that have collapsed in times of crisis because of disastrous acquisitions, enormous debts and lack of leadership.
We also see Dutch companies that seemingly have much success in their strategy of growth by acquisitions. Both are very successful industrial supply companies. Let’s have a closer look at Aalberts Industries in Langbroek and VDL in Eindhoven.
- Aalberts Industries
Founder Jan Aalberts
Aalberts Industries was founded in 1975 by Jan Aalberts. He has built a successful company that currently shows revenues of € 2,7 billion. Aalberts Industries is a lot smaller than VDL but more profitable. It’s headquarters in Langbroek houses a staff of 25 people, so the more than 70 operating companies perform very autonomous. Aalberts Industries is active in 10 end markets in more than 50 countries worldwide and has a strategy of buying only well performing companies with great management. They pay high prices for their acquisitions resulting in 1,3 billion goodwill on the balance sheet. What is the uniting force? It isn’t the family Aalberts anymore because Jan has retired from CEO position in 2014.
- VDL Groep
Wim van der Leegte
Family business entrepreneur Wim van der Leegte never paid too much for his acquisitions. Wim admitted in an interview that he did not have a grand plan for his many takeovers. Badly managed companies were offered to him and Wim and his mates simply reorganized these enterprises and restored profitability and growth. And thus, the VDL Empire was born with over 100 operating companies in many different sectors. From semiconductors to busses and from container systems to motor cars.
Again, the question arises if a company with nearly € 6 billion revenue and about 10 different end markets can still be governed effectively. Since Wim van der Leegte retired from CEO in 2016 the company is governed by a board of directors of 17 managers. Among them his three children and a nephew.
Who is in charge here?
Imperial overstretch happens to all companies that have grown beyond defensible borders. The question is whether these companies have strong, adequate and independent leaders that will stand up in times of crisis and downfall. At Blokker Holding management broke down in fights over control and the governance simply collapsed after the death of founder Jaap Blokker. No one knew what to do because they were used to follow the instructions of the founder.
Is that the same case with Aalberts Industries and VDL? Jan Aalberts has no formal position in the company anymore. How does de financial market think about that? If we look at the stock price we see that between its highest point in January 2018 and today the stock lost 22% of its value while the AEX benchmark is virtualy unchanged in that same period. The company expects to show higher profits this year but the stock has become an underperformer.
Wim van der Leegte has stated in interviews that he visits his company several days per week to discuss potential takeovers with his old friend Rini Vermeulen. We can assume that his influence on the company is still very prominent.
The bloody battle for succession
I believe that both Aalberts Industries and VDL are vulnerable by its sheer size and the power vacuum that evolves when the “emperor” retreats. Looking at the Roman Emperors we see that some successions were successfully planned but most cases were bloody battles between rival factions for control. A boardroom of 17 people is a perfect setting for such a battle. As much as you can coach your successor, true leadership will only emerge in crisis. And history teaches us that crisis will come to all great empires.
Thus a crisis as a chance for leadership, urgency and clarity to emerge. If management is weak and divided however, as in the case of Blokker, the entire empire will fall. True leadership might be imported from elsewhere as Jan Hommen proved with ING and KPMG.
Can we prevent imperial overstretch?
There is way to prevent imperial overstretch. Hadrian became emperor in 117 AD of a huge empire. His predecessor Trajan fought in Mesopotamia (now Iraq) a large and bloody war to gain more territory for Rome. Hadrian broke with this strategy of expansion and retreated his legions from the East. He reduced the size of the borders so that they could be defended effectively. He improved roads, visited the frontiers of the empire and made agreements with local tribes. Voluntary retreat was unheard of in Roman tradition. Yet that smaller, more compact Roman Empire existed for another 3 centuries.
