The past month has been a bit humdrum for the world’s deal-makers. Germany’s main phone utility, Deutsche Telekom, paid £6.9 billion for the British mobile phone operator One-2-One. Volvo splashed out £4.6 billion on the truck-maker Scania. Lloyds TSB offered £7 billion for Scottish Widows. The American stores giant Wal-Mart tidied up its £6.6 billion purchase of Asda.
And rationalisation in the metals industry reduced the world’s aluminium producers from the big five to the big two.
Such is the volume of recent company mergers that this can be considered a comparatively quiet month. Ten-digit deals attract hardly any notice these days in the world of acquisitions. There have to be at least 11 digits to generate excitement or envy among the army of investment bankers, lawyers and accountants who stitch them together.
These are the people, in the City or on Wall Street, who keep the mergers obsession going. Investment bankers and advisers do not wait for client companies to seek their advice. They cold-call companies with merger ideas. They point out how the prospect’s competitors are merging. They calculate the possible synergies of a merger and entice companies with the prospect of a soaring share price. They are energetic, compelling and very plausible.
What they do not do is take any responsibility for the success or failure of a merger. As soon as the fees – typically 0.5-3 per cent of the deal size – have been banked, the advisers are on to their next client. No one in the Square Mile has much interest in assessing the effectiveness of past mergers. What’s done is done.
Every year in the City is year zero. The entire culture is irrepressibly forward-looking – to the next earner, to the next deal. There is little time for reflection and no point in post-mortems. The past truly is a foreign country – a despised, unyielding, low-income place.
The City is constantly castigated for being short-termist. That is unfair. It is prepared to peer decades into the future in search of a profit. Some of the UK’s biggest companies today – the mobile phone operators and the cable TV companies are obvious examples – exist only because the City was prepared to bankroll their losses for years and years. The same is becoming true for Internet-related companies, which may not turn a profit for years.
What the City will not do is look back, even a year or two. It is like a motorist who uses superstrong headlamps for peering into the darkness ahead but does not bother with a rear-view mirror.
Mergers have been at record levels for three years now, and there is no sign that the trend is running out of steam. In the second quarter of this year, British companies were purchasers in transactions worth $139 billion, making the UK the world’s most acquisitive nation.
So far this year, British Petroleum has acquired Amoco in a merger, leaving the combined business today worth £117 billion; Vodafone has bought the American mobile phone operator AirTouch for £43 billion; and Zeneca (formerly the drugs arm of ICI) has merged with Astra of Sweden in a £21 billion deal. You name the industry, someone has tied up with someone else.
Steel? British Steel is combining with its Dutch counterpart, Hoogovens. Insurance? Guardian Royal Exchange got into bed with Sun Life & Provincial. Regional newspapers? The Sunderland Echo and Halifax Courier are now stablemates, following the merger of Portsmouth & Sunderland Newspapers with Johnston Press.
Sometimes the mergers are in the same industry, as with Ford’s acquisition of KwikFit. Sometimes companies diversify. W H Smith, hated by many publishers because of its book-buying policy, now has its own tame publisher in the form of Hodder Headline, which handles John le Carre and Stephen King.
How successful will these marriages be? It will be years before we know and before the mergers industry is judged for its matchmaking. However, the evidence against past mergers is strong. McKinsey, the consultants, found that only 23 per cent of acquiring companies recouped their acquisition costs within ten years. Two-thirds of bidders would have been better off leaving the money in a savings account. Other studies have set failure rates at 50-75 per cent. Even the US investment bank JP Morgan – which has a vested interest in promoting mergers – found in a recent study of 116 deals of $1 billion and over in the past 15 years that only 56 per cent of them had created value for bidders.
The reasons mergers may fail are legion. Rival managers fight for territory. Morale slumps as employees wait for the axe to fall. Computers fail to communicate with each other. Cultures clash. Customers defect. Savings made by cutting out duplications look easy on the spreadsheets, but removing fat without damaging important organs is difficult. Generating real synergies is even trickier. Merging company bosses talk airily of cross-fertilisation of ideas and cross-selling of products. In reality two plus two rarely equals four, let alone five.
Ah, but things have changed, insist the merger-philes. Two factors have altered the landscape, they argue – technology and globalisation. Improved telecommunications and computers make for quicker, better communications in even the biggest organisations. The problems that plagued past deals are no longer an issue. The removal of trade barriers and exchange controls and the blurring of cultural differences between countries have made cross-border deals more enticing. English is the now the language of business in most of the world, and cultural differences between nations are narrowing. Brands originally tailored for Americans or Germans are increasingly exported to the Chinese and Indonesians.
A few successful mergers – in pharmaceuticals, for example – seem to back up the pro-merger lobby, but history suggests that the recent wave of mergers will produce casualties.
True, there is no proof that individual companies would have been better off staying single. The clock can’t be turned back. But the real drive behind merger mania remains that vast army of ambitious and brainy advisers whose job it is to convince client companies and their shareholders that merging works. A lot of second homes and private educations depend on what these advisers call “deal flow”. They get understandably anxious when it shows signs of drying up.
Merging companies often don’t need much encouragement to take the plunge. Their directors can justify bigger pay packets (the biggest determinant of salary size is not performance or profitability but company size). Mergers may also allow them to cash in share options early. Directors who are surplus to requirements receive generous pay-offs. And there’s nothing like the headlines created by a megadeal to massage management egos.
The City today is awash with information. The sheer volume of data available on any dealer’s screen is mind-boggling. But very little of it looks back. A typical share-dealer may examine the previous few days’ price movements before buying or selling. Fund managers – who invest in the stock market on behalf of pensioners and other savers – may look at the previous year or two but they are mostly concerned with the future. Expectations are what move share prices. Even “historical” information provided by Reuters and others goes back only five years. Yet to judge a merger takes sometimes twice that long.
Most of the City’s screen jockeys are in their 20s or early 30s, with memories to match. If ever a community were destined to repeat its past mistakes, this is it.
The writer is economics correspondent of the London “Evening Standard”
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