Magazine article Management Today

Unzipping the Merger Myth

Magazine article Management Today

Unzipping the Merger Myth

Article excerpt

Big-ticket mergers are the society weddings of the business world. But the honeymoon is usually soon over. Anthony Hilton examines landmark deals of the past decade to find out why so many corporate tie-ups destroy shareholder value.

One lunchtime back in 1986, Sir Michael Richardson was in expansive mood. He was then at the height of his powers and influence - the head of corporate finance at NM Rothschild in the days when British merchant banks still ruled the Square Mile; architect of much of the Thatcher government's privatisation programme; Boxing Day guest at Chequers - a true City grandee. 'You know,' he said leaning back and drawing on his cigar, 'there is no deal in the City which I have done, which could not be undone ...' he paused for effect ... 'and hopefully will be.'

Investment bankers think differently about takeovers from ordinary people. As far as the banker is concerned - and particularly these days, now that long-term relationships between banker and client have crumbled - they are just a transaction on which a fee will be earned.

If the merged business doesn't work, it does not matter - simply split it up again. For the industrialist doing the deal, in contrast, it is probably the defining moment of his career, and for the employees too, although in a harshly different way. For both groups, it's a disaster when a merger deal goes sour.

And they usually do. From the perspective of the bidder, between half and three-quarters of all mergers (depending on which management consultant you believe) destroy rather than create value. Nor is this just a phenomenon of our times. Similar studies in the 1980s produced broadly similar results.

Look at the disasters of that time in America - the age of the Barbarians at the Gate.

So in a sane and rational world, almost no-one would opt for a takeover, other than a small infilling acquisition, unless special circumstances made the target company self-evidently a screaming buy. Such occasions are so rare they need not concern us here.

Yet mergers happen all the time - more often in bull markets, where egos rise faster than share prices, but also in the bears. In hard times, troubled businesses can look like a bargain to potential bidders - witness the potential Carlton/Granada merger. Despite the chill economic climate, there was pounds 160 billion of M&A activity in Britain last year, and 2003 got off to a flying start. Sir Ken Morrison's pounds 2.9 billion offer for ailing supermarket chain Safeway has set off a bidding war, with rivals J Sainsbury and Asda (owned by maga-retailer Wal-Mart) also set to throw their hats into the ring.

Many deals are simply a result of the merchant bankers' seductive patter. If a business underperforms, sell it off. If the main product is mature, buy into a new, fast-growing market. If the UK market is saturated, try your luck in America. If the main competitor is tough to dislodge, massage up your share price and slap in an offer. Too often the bosses succumb.

Then the trouble starts - usually because the existing management is not very good, but the proud new owners' under- standing of their acquisition's business is so poor they don't know who else to appoint. So they let it drift, and a drifting company goes only one way. As the CEO of one FTSE 100 company put it: 'When you are only number three in a market and it turns down, then numbers one and two skin you alive.'

So why do the deals keep getting done? Well, Britain's businessmen don't have much fun. We don't have many Bill Gates-style celebrity bosses and the day-to-day running of a business is difficult, grindingly hard work and often very boring. By contrast, a takeover is exciting and glamorous, promising even the dullest managers their brief moment in The Sun, or preferably the Financial Times. It gives them recognition beyond their own boardroom. It makes them someone for 15 minutes. …

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