In business, as in life, marriages that start in blissful anticipation all too often end up in disillusionment and frustrated hopes. Yet this year seems to be bucking the trend
Saturday 21 October 1995
The historical evidence is clear. Mergers do not by and large add value for both sides. Often bidders get carried away and pay more than they should to achieve victory. In other cases, the hoped-for benefits of the deal simply fail to materialise. In business, as in life, marriages that start in blissful anticipation all too often end in disillusionment and frustrated hopes.
Yet this year seems to be bucking the trend. It started with the biggest deal of all, the Glaxo bid for Wellcome, which all the evidence suggests is going to provide significant value for shareholders on both sides. Those in Wellcome have already pocketed a lot of cash; those in Glaxo have also seen their shares rise strongly since the deal was done.
Now we have a second example of the phenomenon, with the Lloyds Bank bid for TSB. Shares of both companies have risen since the proposed merger between the two banks was announced a fortnight ago. Analysts and fund managers have generally welcomed the deal as a sensible next stage in what must be the inevitable consolidation of banking business.
It brings together the management with the best track record among the big clearing banks (Lloyds) and an asset-rich business that has always looked the wrong shape and size to break free from its unusual historical roots (TSB). It is a case where the promised benefits - eliminating costs and branches - seem clear-cut.
It is true that there are plenty of other examples for this year's takeover activity where the benefits look much more marginal. Perhaps the most remarkable feature of all this frenetic deal-making is that an example of apparent winners all round should emerge from the financial sector, where success of this kind is normally least expected.
Whatever the essence of good banking, successful deployment of shareholders' funds in expansionary moves has not by and large been it. Who can forget such egregious follies as Midland's disastrous bid for Crocker in the United States, or the Barclays rights issue just a few years ago when every penny was squandered in what seemed a matter of months?
One reason why takeovers in aggregate usually fail to deliver the benefits promised by the bidder's management is that so much of bidding activity is driven not by economic logic, but by fear or fashion - the dreaded ''me too'' syndrome. If company ABC reckons it is time to take over another, then you can be certain DEF in the same business will immediately think very hard about doing the same.
If you want an example of such vogue activity, just look at the wave of consolidation now sweeping through the drugs and media industries, or closer home at what is happening to building societies, mutual life companies and regional electricity companies.
Seven of the 12 regional electricity companies have received bids already this year, and if there is a single mutual company of any size that has not considered a merger or flotation this year, it must be keeping very quiet about it. In the US, banks are going through a similar wave of consolidation, with last month's Chase Manhattan / Chemical Bank tie-up in New York being followed this week by Wells Fargo's $10bn bid for a fellow Californian bank.
Such powerful phases of consolidation are easy to rationalise at the time. Any merchant banker worth his crust could give you a dozen reasons today why consolidation is necessary in the drugs, banking or electricity business. The trouble is that the patter is plausible, but the logic needs more careful analysis. What is true for one company is rarely true in aggregate.
As a rule of thumb, if the management of a bidding company has to rely on an outsider (or worse still a competitor) to explain why it should be bidding, then the chances are that the benefits it claims to expect will not materialise.
In fact the greatest rewards often go to those who are strong enough and independent-minded enough to resist the herd instinct and stick with their own strategy.
The banking sector itself provides the clearest example. A good deal of the current high standing enjoyed by the management of Lloyds Bank is due to the fact it deliberately stood aside from the feeding frenzy that seemed to grip most of the other banks after the introduction of the City's Big Bang in 1986. Alone among the clearers, Lloyds refused to join the race to buy up brokers, jobbers and investment bankers - a decision for which its shareholders have much to be grateful.
Now, however, it is embarking on a buying spree of its own. The TSB will be added to the Cheltenham & Gloucester to create a more broadly based retail banking business.
The logic of the merger in this case seems genuinely hard to fault; it looks like a coherent and sensible response to the impact that the combined forces of information technology and deregulation are having on the competitive environment in banking.
If so, the Lloyds shareholder may yet live to glory in the day, but don't expect every other deal in the sector to have the same happy ending.
The real reason that building societies and mutual life companies are merging or floating on the stock market is not that there is anything wrong with mutuality per se, but because their industries are suddenly - and some would say belatedly - being exposed to rigorous competition for the first time.
Just as in electricity, the strong must be expected to drive out the weak.
The one certainty, however, is that a good number of the deals that are now being consummated will end in disappointment for managements, customers and shareholders alike.
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It's that time again when the media looks back over the past year and forward to the next. I am reminded of an old film, The Day the Earth Caught Fire (1961). Near the end of the film a newspaper prints two headlines – which one it uses will depend on whether the world is saved or doomed.
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