Seminar 08: Mergers and Acquisitions
Finacial Times, June 30 th 2000, Europe section
FINANCIAL TIMES SURVEY
Buoyant economic conditions, the introduction of the single European currency and investor demand for equities are creating an environment conducive to expansion, writes Julia Ratner
The current spate of mergers and acquisitions in Europe looks as though it is here to stay, for one overwhelming reason: corporate Europe is jockeying to be sure its businesses are large enough, in enough countries and productive enough to compete with companies around the world. "Europe is going through an M&A boom," says
Donald Meltzer, global co-head of mergers and acquisitions at Credit Suisse First
Boston (CSFB). European companies "have a very strong incentive to create, at a minimum, not only pan-European companies but also global companies able to compete with those in the US".
Gordon Dyal, co-head of European mergers at Goldman Sachs, says that while there is no one trend driving the activity, companies in Europe are merging for at least one of the following reasons:
 Companies that are big in their home markets have to look outside their borders to gain a pan-European presence in order to compete with companies in other
European countries. That is why, for example, HSBC bought Credit Commerciale de France.
 Pan-European companies with global aspirations need to make a purchase in another country outside Europe, as Unilever did recently when it agreed to buy
Best Foods of the US.
 Many corporates, after looking at their investments and business lines, have decided to sell those in which they will never be a market or global leader. Allianz and Siemens in Germany are examples.

The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin
The sale by companies of stakes or divisions will lead to more merger activity, Mr
Dyal says. Siemens has been selling business units over the past two years. Allianz's
22 per cent ownership of Dresdner Bank was behind that bank's attempts to merge first with Deutsche Bank, and its later attempts to form an alliance with Commerzbank. "Clients want to be winners," says Mr Dial.
External forces, such as a strong economy, the single European currency and investor demand for equities have created confidence among corporate executives and directors about their businesses' growth prospects. They are willing to write a cheque and perhaps be more creative than in the past to help ensure that growth continues.
Simon Robey, global co-head of mergers at Morgan Stanley, says: "M&A (activity) is still underpinned by low interest rates, capital growth and a strong economy. But what we have seen in the last few years is much more radical than you would expect.
Europe now has more open markets and is more accepting of US takeover tactics. I think there has been a sea change in the M&A market."
No one, though, expects transaction growth to keep up the pace of the past two years. The volume of deals announced in Europe in 1999 more than doubled to Dollars 1.65bn from Dollars 720m a year earlier, according to Thomson Financial Securities Data and volume in 1998 itself was up 40 per cent. That compares with a growth in volume of 5.7 per cent to Dollars 163min 1994. Merger volume so far this year has been less than half of last year's, with Dollars 630m announced as of June 15, according to Thomson Financial. "There continues to be pent-up demand for companies to look at their strategic options and to pursue transforming deals," says Dan
Dickinson, global co-head of mergers and acquisitions at Merrill Lynch. "But if the economy slows, or if a few deals blow up, the growth may slow." Observers agree that economic growth and a buoyant stock market are keeping merger activity in Europe robust.
George Magnus, chief economist at UBS Warburg, says: "Companies do not normally get into bed with each other unless the stock market conditions are conducive to issuing new equity to investors or the stock price of the one doing the taking over is reasonably well-supported to provide financial muscle.
"There is no question that boom periods, peak periods of M&A (activity), are characterised by very buoyant stock markets, and by definition robust economic conditions," says Mr Magnus. But although periods of strong economic growth and bullish stock markets do not necessarily yield an increase in merger activity, heightened merger activity can not exist without them.
The introduction of the single currency is adding fuel to the merger fire but it is hard to attribute the rise in mergers to a single factor. "It is probably a little bit myopic to say the activity is only due to technology, or only due to the single currency, or is only due to the recovery in the European economy," Mr Magnus says.
Last year was, nevertheless, unusual, says CSFB's Mr Meltzer and he does not expect merger activity to be as strong overall this year. Mr Meltzer points to several hostile transactions in Europe last year where the competitive conditions were unusual. For example, opposition to the idea of a take-over of Telecom Italia by its German rival, Deutsche Telekom, enabled Olivetti to step in and acquire the company.
Similar cases are less likely to occur in the future as a more open market for corporate control continues to develop in Europe.
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin
Government support is still a factor in European mergers. When KPN of the Netherlands, telecommunications company, attempted to merge with Spain's Telefonica last month, the Spanish government rejected the plan because the Dutch government still owns a majority of KPN. The Dutch had plans to sell down the stake but the Spanish government wanted the sale to happen sooner and the plan collapsed.
Observers expect European governments to loosen their hold over who they allow their local companies to merge with, though few agree on the timing. Donald Johnson, co-head of European investment banking at Deutsche Bank, says he expects European governments will be forced to change their nationalistic attitudes in the next three years.
"One currency is driving competition. A more liquid and unified European equity and debt capital market with a single currency will fortify the stronger companies, impose greater transparency and competition, andhighlight the weaker companies who will become prey."
Financial Times, June 8 th 2000, p. 13
INSIDE TRACK: MANAGEMENT TAKEOVERS
New research turns conventional wisdom about successful company acquisitions on its head, writes Alison Maitland.
One irony of takeovers is that shareholders in the target company often enjoy windfall gains, while employees suffer disruption, uncertainty and loss. Another irony that fascinates business economists is that shares in the predator company frequently underperform after the acquisition. Could the two be linked?
The question is of more than academic interest. Worldwide merger and acquisition activity reached an astonishing Dollars 2,242bn (Pounds 1,485bn) in the last quarter of 1999 and first quarter of this year, according to Thomson Financial Securities Data.
Two years ago the figure for the comparable six-month period was Dollars 1,077bn.
The deals are bigger too; those whose value has been disclosed are worth an average Dollars 295m, almost double what they were two years ago.
Although mergers have become more popular, they are as hard as ever to pull off.
Cambridge university's Judge Institute looked at 77 large takeovers by UK companies from 1990 to 1996. It found that shares in the acquiring companies underperformed the FT All-Share index by an average of 18 per cent in the two years after their deals.
The secret of success, according to the conventional wisdom, is for predators to act fast. They should integrate the target company as completely as possible and make it absolutely clear who is boss and which corporate culture will dominate.
But a new study* turns this on its head. The research, by PA Consulting Group and the University of Edinburgh Management School, suggests that acquirers who avoid
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin the slash-and-burn approach enjoy better shareholder returns. Deals should take a selective rather than an all-embracing approach to integration. Acquirers are more likely to be successful if they recognise the existence of cultural differences and, before the deal closes, form an "integration team" that includes a substantial number of staff from the target company.
The PA study set out to establish objectively how acquirers could reduce the risks involved in post-merger integration. It surveyed 85 companies that made acquisitions worth at least Pounds 50m between the start of 1997 and mid-1999. The takeover targets were all UK-based, with buyers mainly from the UK, but also from North
America, Australia, Belgium, Finland, Ireland and the Netherlands.
The researchers evaluated different approaches to post-merger integration according to short-term shareholder returns. They calculated these from the difference between share-price performance immediately before and after the merger announcement and its predicted value had the deal not taken place. (Previous research found a strong correlation between short-term share-price movements and long-term cash flows.)
The methods that appear to add shareholder value include early and detailed planning and communication, regular cash-based reports on progress, and explicit rewards for staff who achieve a successful integration.
Jeremy Stanyard, head of PA Consulting's M&A team, says speed is as important as ever. "But people have mistaken this for doing everything very quickly. We're saying you should do certain things very quickly, but be selective about what you do."
In one merger, two sales and marketing departments that had been deadly rivals were hastily integrated, leading to confusion over brand management and the loss of key people.
John McGrath, chief executive of Diageo, the food and drink group, is persuaded by the research findings. "There are dangers in over-integration, or in moving too fast in an attempt to realise all your synergies at once," says the man who presided over the
1997 merger of Guinness and Grand Metropolitan. "It's a question of identifying where value is being created, and then making sure you protect it during the integration process."
Few companies can be happy to see knowledgeable and talented staff walking out of the door. Why then, is it common to ride roughshod over people, even though that causes damaging culture clashes and can diminish employees' commitment?
Rob Yeung, a business psychologist at the London office of the Nicholson McBride consultancy, says acquisitions are often driven by ego. "In many organisations that say they'll respect the target company's values, they're only paying lip service to it," he says. "They don't promote the best and brightest people, but the people who are best for their own purposes." Even sensitivity after the merger will not save deals that are done for the wrong reasons. The PA study also found that the motive for the merger appears to have a crucial effect. Acquisitions aimed primarily at cost savings are found to produce no shareholder benefits. By contrast, those aimed at increasing revenues, gaining access to new markets, or acquiring technology, do tend to deliver value.
Mr Stanyard believes that markets question the strategic value of cost reduction on its own. "If the acquired company becomes leaner and fitter, is that doing anything to
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin take the combined company forward strategically?" In their book After the Merger**, three consultants with A.T. Kearney in Germany support this view. Synergies aimed at "efficiency", rather than growth, can also have an unwelcome psychological impact on employees of the target company. Merged companies seek "early wins", such as factory closures and job cuts, but the antipathy that is stirred up can cause them to backfire.
"There can be no truly successful merger without growth," the book's authors argue.
"The perspective of something positive and expansive creates a much more favourable and optimistic climate than the fear of shrinkage and loss And what methods do the masters of acquisition recommend? A discussion between several well-known managers that featured in the latest edition of Harvard Business Review supports
PA's finding that a high degree of cultural integration is not always appropriate.
"You can't try to slam every acquisition into one mould," says Ed Liddy, chief executive of Allstate, the large US insurance company that has made a series of acquisitions in the past 15 months. "In some cases, we've completely integrated them into
Allstate. But in other cases, much to the chagrin of our very good Allstate executives,
I've said: 'I don't want to Allstate-ise them. I want them to be separate'. What you do with an acquisition depends on the channels and the products that you and the acquired company are in."
The discussion also highlights sharply divergent views among chief executives from different sectors and countries about the importance of both cost reduction and culture. Dennis Kozlowski, chief executive of Tyco International, the acquisitive US manufacturing and service group, says takeovers work best when cost reduction is the main rationale. "You can define, measure and capture them. But there's more risk with revenue enhancements; they're much more difficult to implement."
This is not the view of Jan Leschly, recently retired as chief executive of SmithKline
Beecham, which failed to merge with Glaxo Wellcome under his leadership in 1998, only to do so now. "When we look at acquisitions, we focus on revenues because our production costs, once we've developed a drug, are minimal. So if we can increase revenues, we're in great shape. And what really drives revenues in the drug business is R&D."
Mr Leschly argues that differences between British and American management philosophies can be almost impossible to reconcile. But Mr Kozlowski retorts: "I've never seen a deal really fall apart on a culture issue - or any soft issue. Most collapse on price, and managers just use soft issues as an excuse."
Mr Kozlowski does, however, take cultural issues very seriously. "Moving fast and getting the right people in place are extremely important. At Tyco, we look to the companies we acquire to provide those people." In one case, Tyco took 25 people from the acquired company to a small town in Germany for a weekend to consider ways of changing the business. "They came up with a drastically different organisational structure for the company, which we implemented pretty well 100 per cent." If a deal's success depends so heavily on fostering a culture in which employees feel respected and involved, what are the chances for hostile takeovers? Mr Kozlowski is characteristically forthright. "It's almost impossible to build such a culture when you do hostile acquisitions, which is why we don't do them."
*Creating shareholder value from acquisition integration, available from Sheonagh
Friend at PA Consulting, 020 7333 5260.
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin
**After the Merger, published by Financial Times Prentice Hall.
© Financial Times
Financial Times, February 7 th 2001, p. 17
INSIDE TRACK
– VIEWPOINT – By THOMAS KIRCHMAIER
A study of 38 demergers shows clear benefits for the shareholder. As other forms of divestment become more difficult, we may be about to witness a wave of such deals.
Last week's ann-ouncement by British Telecommunications that it plans to demerge
Yell, its Yellow Pages and online advertisement business, heralds a renewed interest in demergers as an alternative form of corporate restructuring.
Growth in the US economy is slowing and the global merger wave is levelling out - although still at a very high level, with a total of Dollars 3,500bn (Pounds 2,380bn)
M&A announcements last year. We are now seeing that other forms of divestment are also becoming increasingly difficult. Investors show little interest in initial public offerings, as BT unhappily found with Yell. The ability of companies to acquire other organisations is limited in an environment of falling share prices and a constrained debt market. Will the next restructuring wave be one of demergers?
The past few years have seen several prominent deals: in the UK, Zeneca, the drug company, was spun out of ICI, and Argos, the retailer, came from British American
Tobacco. In France, Pathe, the media group, emerged from Chargeurs, a textile company. By looking at 38 such deals over the past decade, the London School of
Economics recently studied the effect of European demergers on company valuations. The conclusion is that demergers are indeed beneficial for the shareholder.
However, demergers do not guarantee success, and not all participants benefit uniformly from the value creation following the demerger.
In a demerger, a company is split into two or more independent parts, and the shares in the new entity are distributed to the parent company's shareholders on a pro rata basis. This process is tax-free provided that a substantial part of the shares is distributed to the shareholders at no cost. Demergers are an American innovation and spread to Britain during the 1980s. In continental Europe, too, demergers have recently emerged as a valid tool of corporate restructuring.
To assess the impact of demergers on a company's performance, we looked at companies at the time of the demerger announcement and in the three years after the demerger has taken place. In both assessments, our study compares share price performance with the performance of the market as a whole. We found that most demergers tend to help companies' share prices outperform the market both at the time of announcement and in the years following the break-up. The shares of companies typically outperformed the market by about 5.5 per cent in response to a demerger announcement. The announcement to demerge had a positive impact on the companies' share price in about three-quarters of all cases - although the remaining
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin quarter, when the announcement to separate was greeted with little enthusiasm by the market, should serve as a warning that demergers do not guarantee outperformance. The sample of companies that had just announced they were to demerge was divided into small and large companies to establish whether size had an important influence. In fact we found considerable performance difference between large and small companies. Whereas the share price of large companies planning demergers rose at the time of the announcement by 3.6 per cent, the group of small companies rose by 7.3 per cent in response. Part of the explanation, but only a small part, is that smaller companies are more likely to be taken over. But the main reason seems to be that smaller companies are more successful in reinventing themselves after a demerger, and in exploiting the new possibilities offered to them after the break-up. Demergers were also particularly successful if the spin-off turned to the market for new capital needed to fulfil a successful business strategy. For companies where the spin-off raised new equity from the market within a year of the demerger, the abnormal return was 14 per cent. The separation into two independent companies removed the funding constraints that the spin-off company had previously experienced as being part of a larger enterprise. Turning to the three-year period following the demerger, the average spin-off outperformed the market by about 17 per cent, whereas the parent company slightly underperformed the market by about 6 per cent over the same period.
Most of this value creation by the spin-offs occurred in the second year after the demerger. It appears that the spin-offs needed about one year to reconfigure the company in a way that would allow it to exploit its new-found organisational freedom.
Here, too, size appears to have been an important determinant of success. Whereas large parent companies underperformed the market by 16 per cent, small parent companies outperformed the market by 9 per cent. Large spin-offs, on the other hand, outperformed the market by 8 per cent whereas small spin-offs outperformed the market by 27 per cent over the three-year period following the demerger. The overall conclusion is that, at least for most companies, less means more. We may be about to witness a new wave of restructuring: demergers. The writer is a researcher at the
Centre for Economic Performance and the Institute of Management, both at the London School of Economics.
© The Financial Times
The Economist, January 9 th 1999, pp. 21-23
The deals and struggles: Doing deals is easy. Mergers hit a record in 1998; this year may be even busier. Now comes the hard part. NEW YORK
AT ONE point in the discussions between Travelers and Citicorp that led to the formation of the world's biggest financial-services group last year, a director asked the question: "Can anybody stop us?" After a short silence, someone suggested "NATO".
Such hubris is well-suited to today's merger mania. In 1998, according to Securities
Data Company, there were mergers worth Dollars 2.4 trillion worldwide, a 50% in-
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin crease on 1997, itself a record year. The list included several jaw-dropping deals, notably the Dollars 80 billion merger announced in December of Exxon and Mobil. This year the deal-making is expected once again to be frantic-the exuberance of the stockmarket will help determine just how frantic. M&A people are already talking about who will do the first Dollars 100 billion merger. Old favourites, such as the drug and banking industries, have more big deals left in them. Britain's Glaxo Wellcome is rumoured to be preparing a bid for its compatriot, Zeneca, which itself is pledged to
Astra of Sweden. Slower starters, such as high-tech and cars, look like catching up: it surfaced on January 5th that Britain's Vodafone is bidding for AirTouch, an American mobile telephone operator, which was already targeted by Bell Atlantic . This week's motor show in Detroit was abuzz with rumours of impending deals involving firms such as Ford, Fiat, Nissan, Honda, Volvo and BMW.
The merger wave, which last year was a predominantly American affair, is now expected to sweep over Europe-though Asia has been surprisingly quiet. Not only do
Europeans have a new single currency, but, as in America, their telecoms and utilities are liberalising and their defence contractors are under orders to rationalise.
Cross-border deals, such as Daimler-Benz's takeover of Chrysler, accounted for a quarter of 1998's mergers ; more are expected as firms go global. In many cases this consolidation makes sense-at least on paper (Exxon-Mobil hopes to make savings of several billion dollars a year). But just as certain as the flow of deals is that most will be failures. Study after study of past merger waves has shown that two of every three deals have not worked; the only winners are the shareholders of the acquired firm, who sell their company for more than it is really worth.
In the past, buyers have justified deals by citing questionable synergies
(remember the hardware-software argument that lured Sony and
Matsushita into Hollywood). But in the heat of a takeover battle, ego often played a greater role than even such dubious logic (read
"Barbarians at the Gate"). One delicious study has noted that the undeserved premium paid is linked to the number of magazine covers the acquiring boss has graced before the deal. Although stockmarkets seem overheated, price may prove less of an issue this time round. One reason is that there have been fewer takeover battles. In the 1980s a quarter of all deals in America were hostile; this time almost all have been agreed. Another difference is that, where cash was once king, equity rules today. In deals such as America Online's takeover of Netscape, investors are simply swapping one piece of overvalued paper for another-and who can say which company is the more overvalued? If many investors own shares in both parties, as is likely
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin in such huge mergers as that between Exxon and Mobil, the "price" paid matters still less.
Instead, success will depend more than ever on the merged companies' ability to create added value. And that will depend mainly on what happens after the deal has been done. Yet many deal makers have neglected this side of the business. Once the merger is done, they simply assume that computer programmers, sales managers and engineers will cut costs and boost revenues according to plan, leaving the boss free to bag the next big deal.
Yet, just when post-merger integration has become decisive, it has become harder to pull off. Not only are modern firms complicated global affairs, but executives are putting today's deals together in a hurry. Few give enough thought to the pitfalls.
One set of obstacles is "hard" things, such as linking distribution systems or settling legal disputes. In particular, many recent mergers have been undone by the presumption that information technology is easy to mesh together.
The marriage between Union Pacific and Southern Pacific in 1996 was supposed to deliver a seamless rail service and Dollars 800m in annual savings by using UP's top-notch computer system to drag the ramshackle SP up to standard. But soon traffic snarled up around SP's Englewood yard, near Houston. At one point in 1997,
10,000 wagons were stalled in Texas and California. With operating profits falling, the firm halved its dividend last year. Its share price is a third below 1997's peak of Dollars 72. Similarly, Aetna, an insurer, bought US Healthcare, a health-maintenance organisation, partly for its computer systems, which could sift out the best doctors.
But the two firms had terrible problems combining their back offices. And when Wells
Fargo bought First Interstate in 1996, thousands of the banks' customers left because of missing records, queues and administrative snarl-ups.
Then there is antitrust. In times past, people would pay more attention to legal issues, sounding out regulators in advance. These days firms jump into bed within weeks of meeting, and regulatory concerns come later. The Pentagon's objections shocked
Lockheed Martin and Northrop Grumman, and scuppered their planned merger; MCI and WorldCom, two American telephone companies, were also surprised by objections to their Dollars 37 billion marriage from European regulators. The trust-busters may yet nobble Exxon and Mobil; last week BP and Amoco had to shed 134 petrol stations in return for approval.
A soft trap
Most difficult are the "soft" issues. Another reason Wells Fargo and Union Pacific ran into problems was that they sacked too many of the wrong people. Sony's and
Matsushita's hardware-software dreams may have been mad from the start; but the
Japanese also had nothing in common with the Hollywood smoothies they hired.
Look behind any disastrous deal-AT&T's acquisition of NCR (bought for Dollars 7 billion in 1991; spun off in 1995 for Dollars 3 billion); or Quaker Oats's takeover of
Snapple (bought for Dollars 1.7 billion in 1994; sold for Dollars 300m in 1997)-and the same word keeps popping up: culture.
People never fit together as easily as flow charts. Nobody can fault the strategy behind the merger between AOL and Netscape and their joint venture with Sun Microsystems to push electronic commerce. The deal links the biggest Internet service
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin provider, a leading creator of software and the firm that invented the Java computer language, which can run on any platform. Yet the plan may go awry all the same.
Netscape is staffed by idealistic hackers, but AOL is a mass-market firm devoted to making on-line services unthreatening. Sun has had many disputes with Netscape over Java. This unlikely trio will be up against the powerful, coherent corporate cultures of IBM and Microsoft.
Culture permeates a company, and differences can poison any collaboration. After one large American merger, the two firms had a row over the annual picnic: employees of one company were accustomed to inviting spouses, the others were dead set against the idea. The issue was resolved by allowing spouses only in alternate years.
Often rivalries go right to the top. The hastily announced drug merger between Glaxo
Wellcome and SmithKline Beecham collapsed when neither boss was prepared to pay second fiddle. The vogue for appointing co-chief executives, a common feature of today's friendly deals, looks like a case of avoiding hard decisions. At the new
Citigroup, employees spend much time trying to work out whether Sandy Weill of
Travelers or John Reed of Citicorp is top dog. The combined firm's troubles recently led to the loss of a high-flying manager, Jamie Dimon. Each side tends to think it is better: asked about the group's integration in South-East Asia, one Citibanker quipped that Travelers "doesn't even know how to spell emerging markets". Two new things have made culture clashes harder to manage in mergers. The first is the growing importance of intangible assets. In advertising, for instance, most of the value can walk out of the door. But in an age where almost anything can be outsourced, even humdrum companies rely on webs of relationships with suppliers and customers that become vulnerable during takeovers. John Harbison, a consultant with Booz Allen &
Hamilton in San Francisco, identifies Quaker's uncertainty over Snapple's distribution network as one reason why the takeover failed. He advises clients that competitors' mergers offer a great opportunity to poach distributors and customers.
The second new thing is the number of cross-border mergers. The link between
Sweden's Pharmacia and America's Upjohn in 1995 was supposed to be driven by cost-cutting and matching drug portfolios. But time was wasted on rows about "American" practices, such as banning alcohol at lunch. Even worse, Pharmacia had not integrated an earlier Italian acquisition. The new company started with power bases in
Stockholm, Milan and Michigan. After a botched attempt to make everybody report to a new office near London, the firm moved to New Jersey and appointed a new boss,
Fred Hassan.
DaimlerChrysler may prove a case study in differing management cultures. One worry is compensation. Chrysler's boss, Robert Eaton, who took home at least Dollars
70m in the takeover and is used to earning some Dollars 6m a year, has to report to the more modestly rewarded Jurgen Schrempp. An American manager posted to
Stuttgart, say, may end up reporting to a German manager who is earning half his salary. Mr Schrempp talks about overcoming this with a low basic salary and a high performance-based bonus. But if Chrysler cuts pay, its managers may depart. And egalitarian Germans dislike huge pay disparities. Jurgen Hubbert, the firm's passenger-car development director, shudders to think of his reputation in his small home town if it was reported that his pay had tripled.
Nor is pay the only difference. Chrysler likes to pride itself on its buccaneering approach, where speed and ingenuity are prized. It builds cars around common platforms, with teams of engineers, designers and marketing people working on each
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin model. Daimler-Benz has a more traditional "chimney" structure, in which designers and marketing people mix less-and engineers are in charge. One reason why Mr
Schrempp bought Chrysler was precisely to pick up its lean ways; but it will need to be done subtly-and, ominously, Dennis Pawley, Chrysler's respected head of manufacturing, has already said he is leaving the new company.
Culture clashes could also undo another German-American merger, the takeover of
Bankers Trust by Deutsche Bank. It would be hard to find two financial-services firms with more different approaches: buzzy deal makers and traders at Bankers, stodgy commercial bankers at Deutsche. The German bank has a sorry record of trying to succeed in the racier field of investment banking; its prospects with Bankers look little better.
Thinking it through
There is a dire shortage of managers able to make a go of mergers on the huge scale of many recent ones. For every Jack Welch (of General Electric) and Percy
Barnevik (formerly of ABB Asea Brown Boveri) who have bullied companies together, many more have foundered. Some deals, such as Disney's takeover of Capital Cities/ABC or Grand Metropolitan's marriage to Guinness, have simply been disappointments. But some takeover artists have crashed spectacularly-most recently
Cendant, a services conglomerate. Some recent deals will no doubt prove a stunning success. Nevertheless, there are three ominous signs about the current merger boom. First, much of the attention seems to be on the deal, rather than the integration, especially in the United States. In a 1996 survey by Booz Allen & Hamilton, European and Asian managers awarded their American merger partners high marks for pre-bid skills, such as negotiating; the area where they did worst was in planning and executing the integration of the firms. Cendant ended up with two bosses and two different accounting centres: neither side really knew what the other was doing.
Second, many deals are rushed. Cendant clocked up 12 big deals in four years, increasing its share price by 2,000%. This week AT&T added to investors' fears that its
Dollars 37 billion takeover of Tele-Communications Inc (TCI), America's biggest cable-television firm, had been much too speedy by suddenly changing the blueprint for how the firms would be joined together. Recognising the differences between the cable and telecoms industries, the firm will no longer list its long-distance business with
TCI's cable business and its own mobile subsidiary, as planned. Many bosses argue that rapid negotiations are necessary. Given the inevitable conflicts between rival managers, they say, the sooner the ink is dry the better. There are also often genuine
"first mover" advantages. On the other hand, integrating two firms successfully requires advance planning: unless decisions are taken swiftly, resentment builds. Third, mergers have too often become a strategy in their own right. For instance, most
American bank deals have been done in the name of cost-cutting. Yet when Anthony
Santomero, of the Wharton School, examined the cost-cutting performance of banks in America, he found that merged banks had generally cut costs more slowly than their non-deal making peers. His explanation is that the mergers probably distracted managers' attention from the real business of cost-cutting. This can have terrible consequences. Boeing had a ghastly 1998, reporting its first loss in 50 years and writing off Dollars 4 billion, partly because it was distracted by implementing its merger with McDonnell Douglas.
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin
So the things that are so impressive about today's mergers-their size, complexity and downright daring-could count against them if the economy turns down. In one way the Citigroup wag was right: the new colossi look as powerful as NATO. But equally powerful people may be needed to clear up the mess when things go wrong.
© The Economist
The Economist, January 9 th 1999, pp. 15-16
Last year mergers and acquisitions hit record levels; this year managers' main task will be to make their mergers work
REACH for the safety-pins and the sewing thread: companies are joining together as never before. Mergers last year were worth 50% more than in 1997 and more than twice as much as in 1996. The year ended in the crescendo of the Exxon-Mobil Dollars 80 billion deal. This year, if the stockmarket continues to fizz, may see the first
Dollars 100 billion merger.
Heady stuff, to be sure; yet there is one big oddity about this renewed urge to merge.
Repeated analyses by business gurus, management consultants and investment bankers have all reached the same conclusion: in the medium term, fewer than half of all mergers add value. The shareholders whose company is bought end up richer; the shareholders of the buyer seldom do. For today's companies, the moral is not that merging is always wrong, but that it is risky . How, the prudent boss should ask, can we be one of the minority that succeed, rather than of the majority that fail?
In fact, the current bout of mergers might just turn out a larger crop of successes than its predecessors. Like many mergers of the 1980s, today's have been swept along by teeteringly high stockmarket valuations. But unlike those, which were often about grabbing new markets or supposedly undervalued businesses, many of today's are defensive. Frightened by contracting markets (the defence industry); by falling commodity prices (oil); by excess capacity in key markets (cars); by the uncertainties of technological change (banks and telecoms); or by the soaring costs of research
(pharmaceuticals): companies in many industries think they are more likely to prosper if they are huge than if they are merely large.
One consequence has been an end to what Andrew Campbell, a British management guru, calls the "grass-is-greener" sort of merger. Ten years of dismantling conglomerates have driven those out of favour. Booz Allen & Hamilton, a consultancy, reckons that less than 10% of mergers now go beyond a company's core business.
Mergers are more likely to succeed when companies buy businesses they know something about. Another reason for modest optimism is that many companies have turned senior managers into substantial shareholders, ensuring that their interests are more closely aligned with those of other owners of the business. That may have discouraged the more flagrantly egotistical deals. In addition, many of today's mergers command no premium, and are agreed rather than hostile takeovers. That reduces the danger of paying too much; and share swaps also spread the risk across the two firms' shareholders.
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin
But there is still plenty of scope for failure. Indeed, the marvel is that any mergers create value at all. Initially, many destroy it. They throw together two teams of managers who may have spent their working lives beating hell out of one another. They scare employees, who know that "economies of scale" spell redundancy. They signal to competitors that customers, suppliers and good staff are up for grabs. They wreck carefully nurtured corporate cultures. And, when they straddle national borders, they offer plentiful opportunities to be nasty about the foreigners in the next room.
When it works, it's wonderful
So how to succeed? The most basic principle is to be crystal clear about the logic of the deal. However wrapped up in sonorous stuff about synergy, plenty of mergers begin with sheer executive boredom. For the folk at the top, running a company can be dull. Organic growth, in a mature market, is grindingly slow. Doing deals is easierhire a bunch of investment bankers and set them to work-and much more exhilarating. A chief executive spends perhaps five years in the top job: the surest way to make a mark in so short a time is to buy something big. Quite apart from the surge of adrenalin, it brings the gratifying attentions of investment bankers, and makes a splash on the financial pages. Brokers are pleased: now your share price will moveone way or another-and so they will make money. Testosterone, vanity and greed are poor ingredients for successful merging.
So is the fear of looking foolish, or of being left behind. All too many boards are carried away by a terror that they will be bought before they can buy. Even when the initial courtship sows doubts, too few decide, as Monsanto and AHP apparently did, that it is better to break off the engagement and return the presents than to go through with the wedding. That decision is even harder to make when everyone else is pairing off: copycat mergers-where one big deal is hastily followed by others in the same industry-seem especially prone to problems. Watch what happens to the car companies that imitate Daimler-Benz and Chrysler. Mergers are more likely to work when a company chooses a partner that fits well, rather than one that is merely available.
Instead, look for similarities. That does not mean only a good business fit, vital though that is. Dunlop and Pirelli were in the same business, but their merger floundered. Nor does it require similarity of size: mergers of equals seem to be especially tricky, perhaps because they disrupt two strong corporate cultures, and they often throw up intractable problems of leadership. More important is similarity of outlook.
One of the most successful mergers in pharmaceuticals, between Sandoz and Ciba
Geigy to form Novartis, was between two firms whose closeness of approach was the greater for being based in the same Swiss town (and doubtless run by chaps who had done national service together).
Even more crucial, concentrate on the marriage, not the wedding. Doing a deal involves delicate compromises. Yes, you can keep your headquarters in Arkansas, if our chief executive can share the top job with yours. No, we will not close your branches: perish the thought. Too many mergers-such as that between Travelers and Citicorp-duck the hardest questions until after the deal has gone through. A whole consulting industry thrives by advising companies on post-merger integration, a salvage operation to recover something from the wreckage of impossible promises and ill-considered goals. Companies that agree on a clear strategy and management structure before they tie the knot stand a better chance of living happily ever after.
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin
And once a merger is agreed, put a managerial heavyweight in charge, full-time, of making it work. This is more essential than ever when a merger is the product of weakness rather than strength, as so many of today's are. Such deals will succeed mainly by cutting capacity, which may mean product lines or branches, but almost always means jobs. To push through these cuts quickly, explaining them to bewildered and resentful employees, is often the hardest part of making a merger succeed.
When the investment bankers have taken their cheques and moved on, that is the job the managers are left with. Some may even wish they had laid aside the safetypins and stuck with boring old organic growth.
© The Economist
The Economist, January 23 th 1999, pp. 69-70
Europe's quiet restructuring: Big European deals may catch the headlines, but small ones are doing more to reshape the continent's business. PARIS
KCI KONECRANES is not a household name. Until 1994 the firm, which builds dockside cranes, was a division of Kone lifts in Finland. Then Industrie Kapital, a venture-capital firm that is based in Stockholm, backed a management buy-out. Since then KCI Konecranes has bought small crane firms around the world, floating on the
Helsinki stock exchange in 1996. Its sales were FM2.3 billion (Dollars 418m) in the first eight months of 1998 alone, compared with FM1.3 billion in the first eight months of 1995; it now has a market value of FM124m. In its modest way, KCI Konecranes is a model for the restructuring of European industry.
The reshaping of the business landscape in Europe that is sure to follow the introduction of the single currency, the euro, involves a huge amount of humble spadework as well as the moving of billion-dollar mountains. Partly because smaller deals are less likely to attract the attention of politicians, they tend to proceed smoothly and to follow industrial logic. They have grown rapidly in volume in the past two years. According to Securities Data Company, 8,917 acquisitions were announced in Europe last year, with a total value of Dollars 594 billion-a third more than in 1997. As many as 96% of last year's deals were worth less than Dollars 250m apiece.
This frenzy of activity is consolidating the smaller parts of European industry, which are more fragmented than their American counterparts. Europe has 40 battery manufacturers, for instance, compared with five in America; 50 tractor makers to America's four; and 16 firms building railway engines, compared with just two in America. Consolidation offers huge scope for improving the profitability of European firms. Research has shown that the more concentrated an industry, the higher its return on capital employed . As well as creating firms on a continental scale, smaller deals are helping to dismantle the conglomerates that were constructed in the days when the single market, let alone the euro, was just a twinkle in Jacques Delors's eye. Vivendi, a French infrastructure firm, has recently struggled to create a more focused outfit from its previous incarnation of Generale des Eaux, a sprawling conglomerate.
Among the many bits it has shed, several have been bought by investors keen to
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin give experienced managers the chance to follow their instincts. General Healthcare and Generale de Sante, for example, its British and French health-care divisions, were bought in July 1997 by Cinven, a British venture-capital firm, to add to Amicus, a health-care firm it had acquired two years earlier.
Having escaped out of a big firm-even a well-managed one-managers can work wonders. Elior, a French catering and fast-food company, got its start in 1991 when its co-presidents, Francis Markus and Robert Zolade, led a group of managers at Accor, a service company that was concentrating on hotels, in buying a controlling stake in what was then Accor's restaurant division, Generale de Restauration. Thanks partly to acquisitions, it has subsequently become one of a number of European catering firms that are enjoying rapid growth on the back of the outsourcing of company canteens across Europe. Elior did not look for a backer until after it had emerged from Accor's shadow. More often, specialist buy-out firms are involved from the start. Their interest is not new. Britain's biggest venturecapital group, 3i, which started in the
1950s as a government body but has since been privatised, bought British
Caledonian in the 1950s and merged it with other regional British airlines to form BCal, which was eventually taken over by British Airways.
The novelty is the arrival of venturecapital firms flush with money from successful deals in America. One example is
Hicks, Muse, Tate & Furst, which built America's largest radio-broadcasting chain by amassing over 465 local radio stations. Kohlberg Kravis Roberts recently opened an office in London; on January 13th it said it intended to raise a fund of several billion dollars to invest in Europe. According to one banker, at least Dollars 20 billion of
American money is in place.
Hicks Muse claims to have coined the phrase "buy-and-build" to describe its approach, in which one firm in an industry is used as a nucleus to which further acquisitions can be added. In the past six months it has bought its first two European platforms, Glass's Group, a British provider of information about second-hand cars to which it hopes to add similar businesses elsewhere in Europe, and Daehnfeldt, a
Danish subsidiary of Britain's Booker, which Hicks Muse will use as the nucleus of a hybrid-seed business. Venture capitalists are expecting consolidation in lots more industries, including cellulose, printed-circuit boards and nursing homes. Buy-and-build, according to Ed McKinley of Warburg Pincus, an American firm that has created several health-care firms in Europe, seeks to combine the long-term strategic insights of managers with the speed and flexibility of financially driven raiders. The strategy is not to strip assets, but to build businesses. The venture-capital backers pull out only when their proteges have grown to a certain size. Flotation was the route taken by 3i
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The LSE Summer School 2004 – Management Programme – Organisation and Strategic Management
Class Teacher: Niels-Erik Wergin for Schlott, a specialist printing firm that it backed in a buy-out in 1993. After buying similar firms every year, Schlott has grown to be the largest firm of its kind in Germany; it listed its shares on the Frankfurt stock exchange in early 1998. A trade sale is an alternative. 3i bought Pharmaceutical Fine Chemicals from a large chemical group in Milan in 1995. After PFC had been built through acquisition into one of the leading firms in its niche in the catalyst business, it was sold for Dollars 164m in 1997 to an
American chemicals firm.
Small and beautiful
The influx of Americans, and the interest of a number of new European venturecapital firms, is beginning to worry investors. The fear is that all these buyers will push up prices for core firms and lead to bidding wars for the add-ons. One venture capitalist disavows "buying to build". It fears that too many of the gains to be had from building a pan-European business are now capitalised into the initial purchase price.
Yet from the perspective of the European economy, that might be no bad thing.
Whether they win or lose, the venture capitalists will have helped to oil the wheels of
Europe's huge restructuring. In any case, the experience of the American buy-outs of the 1980s was that onerous financial targets are a great incentive to managers to get their new businesses into shape. That is why poor management is the real risk for
Europe's buy-and-build strategies. American money has got European restructuring underway. But its success lies in the hands of European managers.
© The Economist
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