Is Bigger Better?

But this argument has holes when it comes to the logic of talent. Young rising stars are much more interested in working for small, fast companies than enduring the lengthy Darwinian selection process that big companies impose on them. Too many fast companies can compel talent by offering all the entrepreneurial bells and whistles: stock options, fun and challenging environments, frequent promotions, and the adrenaline rush that comes from taking risks. That talent issue is the Achilles' heel of the behemoths.

The merger-and-acquistion frenzy has had another big impact. It has changed the business environment in Silicon Valley. You now are seeing fewer starry-eyed entrepreneurs - and more opportunists who are looking for places to create value, but who don't expect to be running the company for the next 50 years. I call these roving bands "opportuneurs" - hybrids of opportunistic businesspeople and entrepreneurs. They are part of a fundamental shift in the startup world.

David Dorman lived through the 1996 merger between Pacific Telesis and SBC Communications Inc. - one of the largest mergers and acquisitions in corporate history - to become executive vice president of the merged company. Currently, Dorman heads PointCast, an Internet news and information service.

Charles B. Ames

Operating Partner

Clayton, Dubilier & Rice inc.

New York, New York

The real issue is not size - whether bigger or smaller is better - but focus. While the notion of economies of scale is a valid argument to explain the frenzy of mergers and acquisitions, the more important question that we need to ask is, What is that scale?

When I was CEO of Goodrich Tire, our competitors - Michelin, Goodyear, and Firestone - had a lot more money for product, process, and market development. Sure, we could compete with them over the short-term. But over the long-term, they'd grind us down through improvements that we couldn't afford. In that case, bigger was better. But I often wondered: If I'd been, say, the head of Michelin - would it have done me much good to merge with Good- year? I'm not so sure.

It's unhealthy to get too big; when you bulk up, you become bureaucratic and lose the ability to focus. But can a landscape filled with bureaucratic, unfocused megacompanies be a positive development for the world of business? Absolutely - if only because it creates an environment rich with opportunities for companies that are fast, flexible, and focused.

But as a fast company, I wouldn't even try to work with the behemoths. They're too bureaucratic and tough to deal with. Instead, I'd attack them.

Charles B. Ames became associated with Clayton, Dubilier & Rice Inc., an investment firm specializing in management buyouts, in 1987 when he was asked to serve as chairman and CEO of the Uniroyal Goodrich Tire Co. - a portfolio investment of Clayton, Dubilier & Rice Inc. Ames is also chairman of Wesco Distribution Inc., a $2.5 billion electrical-distribution business.

Tim DeMello

Chairman and CEO

Streamline inc.

Westwood, Massachusetts

One of the biggest challenges a fast company faces in this world of merger mania is to leverage the credibility, name, and presence of megacompanies - and to do it without becoming captured by them. In the early stages of our business development, we had no credibility - with the marketplace, with investors, with customers, or with top talent. I learned that how you present your company is crucial. For instance, when talking about Streamline, I could say it is simply a company that delivers a bunch of groceries. Or I could mention how SAP AG, Paine Webber, Intel, and GE Capital have all made investments in us. Does that change anyone's opinion of us?

But fast companies face inherent dangers in the merger dance with behemoths. They've got to walk the line between maintaining their flexibility and making sure that they don't become simply part of a solution for the bigger company. This danger becomes exacerbated when you have several strategic partners at your table. For instance, Paine Webber is one of our investors. But as we look at taking our company public, the question we're asking is, "Who will be the best lead underwriter for us?" What if, for example, we determine that it's not Paine Webber? It's important to stress that reaching strategic agreements with a company in the early stages of your development doesn't necessarily bind you into conducting all of your business with them. A great deal of my time is spent in communicating this principle to our partners.

One thing we've done to safeguard against these conflicts is not taking large investments from any one source. We create a balance among our investors so no one has a dominant position. Sometimes this means we've got to say no to a suitor-investor. For example, EDS approached us about investing in us and creating a strategic relationship. But we didn't feel that a relationship with them would be in alignment with what we were doing. So we passed. That's hard to do. Navigating a strategic relationship is like navigating a minefield. The benefits are tremendous, but so are the dangers - and you've got to manage it carefully.

Before launching Streamline, Tim DeMello (tdemello@streamline.com) was founder and CEO of Replica Corp., an educational game company. Streamline uses the Web to alleviate some of the mundane hassles of life: buying groceries, renting videos, and doing the dry cleaning.