Synergy, Banks, Blackstone

Chidem Kurdas

According to Alfred Chandler, the great business historian, American industrial productivity grew at a fast clip in the past century thanks to economies of scale and scope.  What he called scope economies goes by the name of synergy in non-academic circles. The idea is to apply a company’s capabilities to diverse areas, thereby getting more value from given resources.

But achieving synergy has been a tricky goal, leading to debacles. Thus the rationale for Time Warner’s infamous acquisition of AOL was to apply new-economy internet abilities to old-economy media products. Turned out, there were no great gains to be had from this crossing, at least not in the particular circumstances.

In finance, the prime example is investment banks. Bringing a variety of financial activities under the same corporate umbrella, investment banks appeared to reap the advantages of scale and scope for some time. But the diversified bank model came undone in the 2008-2009 crisis.

The regulatory reaction that followed sought to restrain bank diversification, with  the Volcker rule of the Dodd-Frank Act limiting private equity and hedge fund investments. Vikram Pandit’s recent resignation is a reminder of the stresses facing Citigroup, a particularly problematical amalgam of businesses. Even the most successful of the investment banks, Goldman Sachs and JP Morgan Chase, will likely find synergies hard to achieve under the new circumstances.

So it was interesting to hear the folks from Blackstone refer to synergies in discussing the company’s strong third-quarter performance and what they describe as favorable prospects. Chief financial officer Laurence Tosi said they look to leverage resources to new asset classes and spoke of creating lasting synergies.

To find the synergy sweet spot, a company needs to correctly identify businesses that use common resources. Skills and experience, particularly in dealing with risk, are key capabilities that can be leveraged in this way. A group of people who know how to control risk in real estate investing can apply the same general approach to energy investing, and so on. This is presumably what Blackstone is doing.

The asset manager may have found the right mix, judging from its expansion—assets under management grew 31% year-over-year, to about $205 billion. Moreover, not being subject to the restrictions that hobble banks, it can continue moving into areas that make use of its capabilities. It just has to avoid the financial equivalent of AOL.

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