INDUSTRY OPINION

Does the Crown/Star merger pass the Drucker test?

S u d h i r H . K a l é*

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.

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 alliaSuccessful 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 costcutting 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.

Conclusion

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 Star-Crown 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 customerorientation 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 lesscompetition 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 skale@gameplanconsultants.com.

Peter Drucker’s six rules

1. The successful acquisition based on what the acquirer contributes to the acquisition.

2. The successful acquisition must be based on business strategy, not financial strategy.

3. The two entities must share a common core of unity, such as markets and marketing, or technology, or core competencies.

4. The acquirer must respect the business, products, and customers of the acquired company, as well as its values.

5. The acquirer must be prepared to provide top management to the acquired business within a fairly short period, a year at most.

6. The successful acquisition must rapidly create visible opportunities for advancement for both the people in the acquiring business and people in the acquired business.

Alderney: an online safe harbour amidst Asian market turbulence

Susan O’Leary*

With over 20 years’ experience of the eGaming industry, the Alderney Gambling Control Commission is well placed to assist Asian operators to navigate the ever-changing eGaming landscape.

Over the past 12 months we’ve witnessed a radical shift in Asia’s gaming landscape, highlighting instability across the market. Covid has been just one contributing factor, adding to the existing regulatory inconsistencies across the region, uncertainty in the Philippines and now pressure from Beijing, leaving the gaming industry in a precarious position.

The differing ways in which Governments across the world are handling the COVID crisis has highlighted flaws in some business set ups and potential concentration risks for those with operations in one sole jurisdiction, especially where that jurisdiction proves restrictive to business continuity.

We’ve seen this play out in the Philippines, where POGOs affected by the seemingly endless lockdowns, changeable eGaming regulations and Government management of COVID have been forced to look outside of their home ground for solutions to allow them to continue to operate. Many have sought out the experience and consistency offered by a jurisdiction like Alderney who understands the industry, and the challenges faced by global operators.

It’s not just the Philippines though, the unpredictable approaches to eGaming regulations across Asian countries has left operators in a state of flux for some time now. The recent news from Beijing sent a clear message to the industry, in no uncertain terms, and we’re already seeing businesses now taking steps to diversify and change direction.

In times of such uncertainty and change, many businesses have taken the opportunity to look for a new or additional base providing much needed stability, with a strong, respected regulator and steady political backdrop ranking high on the criteria for choice of jurisdiction.

Throughout the pandemic, Alderney eGaming, the strategic and developmental arm of the Alderney Gambling Control Commission (AGCC), has been advising gaming businesses, suppliers and advisors, many from Asian countries, who have taken the decision to work with a regulator who understands their business, and has experience of their markets.

Much of the work for 2020 and 2021 has centred around those who are choosing to relocate, with Alderney eGambling assisting them not only with the licensing element, but also to strategize and plan the logistics of the move.

For some, relocation has meant a satellite office to support offices in other established jurisdictions. For others it’s a relocation of the entire operation to the Bailiwick of Guernsey (of which Alderney is the second largest island.) The options for regulation from the AGCC have been tailored to meet the needs of the industry and provide flexible solutions: being licensed by the AGCC and holding a physical based in one of the Islands of the Bailiwick, or holding a licence with the AGCC and maintaining a company structure elsewhere.

Alderney has regulated Asian facing businesses for a number of years and the stability of the Bailiwick has also attracted many Asian operators. This year has seen several seek out a business continuity solution and it’s easy to see why when you look at how the pandemic has been handled by the jurisdiction.

Businesses on Guernsey and Alderney have been largely able to continue as normal throughout the past year since the initial lockdown ended, with only a short period of disturbance which was quickly resolved with a circuit break-style intervention at the start of 2021. There are currently no restrictions on socialising and masks are not mandatory. The Bailiwick blueprint, mapping out the Islands’ strategy for a return to normality post Covid, looks to allow for movement in and out of the islands without quarantine restrictions by the start of July.

The two largest Islands of the Bailiwick, Guernsey and Alderney, offer a supportive government, political stability and the backdrop of a cosmopolitan business community and an enviable island lifestyle and AGCC licensees can choose to base themselves in either Island.

While other jurisdictions have spent recent years adjusting their regulations to fit every whim and trends of the ever-evolving industry, the AGCC has already created a licensing framework and approach that has been able to stand the test of time, incorporating new technologies and innovations effortlessly. Working in the Asian space for many years, the AGCC has adapted unique solutions to meet the needs of the operators in the region.

The events of the past 12 months have, undoubtedly, brought challenges for many, but it’s reassuring to know that a safe harbour exists for businesses facing disruption. The stability and certainty offered by Alderney is tried and tested, with a regulator who understands the challenges and supports its licensees and a jurisdiction that is already welcoming new businesses. The opportunity exists now to not only succeed in navigating the rapidly changing landscape post-Covid, but to thrive while doing so.

*Susan O’Leary is the CEO of Alderney eGambling, the Alderney regulator’s strategic and development body. As a lawyer, she represented some of the world’s leading eGambling operators and gambling service providers including many of Alderney’s licensees for many years; and as such has perspective on both the commercial and regulatory elements. Susan has a clear understanding of the online landscape and is a regular speaker at key industry conferences and events globally.