America: land of the spree: British firms have been frantically buying up US companies, but some have come a cropper. William Kay highlights the pitfalls
Sunday 09 October 1994
Despite such occasional horrors, the British love affair with the land of Uncle Sam, Bill Clinton and Forrest Gump continues undiminished. In the past fortnight alone, Reed Elsevier, the Lancet and Woman's Own publishing group, has splashed out nearly pounds 1bn on the US database publisher Mead Data Central, J Sainsbury has added to its American east coast supermarket chain by snapping up 16 per cent of Giant Food for pounds 205m, and Reckitt & Colman has bought L&F, the Lysol disinfectant group, from Eastman Kodak for pounds 1bn.
Those deals follow pounds 3.2bn of purchases by SmithKline earlier this year. And in April BAT Industries added to its personal US love affair by buying American Tobacco for pounds 1bn. For many years BAT owned the upmarket fashion retailer Saks Fifth Avenue, and in 1989 it added to its financial services interests by buying the California-based Farmers Insurance.
Although Americans have been investing in Britain for most of the century, there has been a great flood of purchases by UK companies in America since 1980. According to figures from the Confederation of British Industry, a million Americans work for British businesses in the US, and the UK accounts for 23 per cent of total foreign investment there. Conversely, 40 per cent of Britain's foreign direct investment is in the US. Several companies, including Hanson and SmithKline Beecham, are effectively Anglo- American, so evenly are their interests split on either side of the Atlantic.
Last week Hanson could not resist adding to its extensive US arm, Hanson Industries, with the pounds 230m purchase of Carter Mining Company from Exxon, the oil giant. Included in the deal is 1.2 billion short tons of coal reserves, as well as the exotically named Rawhide and Caballo coal mines in the Powder River Basin, Wyoming.
Christopher Collins, in charge of Hanson's merger department in London, says: 'We already have a very big presence in the US. We have got the set- up in the US to look for opportunities and manage them. The original driver was Lord White, who went to live there, and it has been built with US management.'
The emphasis is particularly strong in manufacturing, where UK investment is broadly equal to that of the next three countries - Canada, the Netherlands and Japan - combined. Petroleum, services and insurance are also prominent.
By contrast, with rare exceptions such as Sainsbury and Body Shop International, retailing has proved the toughest nut to crack in the US. Marks & Spencer paid dollars 750m ( pounds 470m) for Brooks Brothers, the swish men's tailoring chain, in 1988 and is still trying to make it pay.
But although the buying spree abates from time to time, there does not have to be much excuse to get it going again. The strength of the pound against the dollar appears to have sent the sap rising and the deals flowing this year.
As Lloyd Bentsen, the US Treasury Secretary, put it in an address to the CBI in June, America and Britain are the largest foreign investors in one another's economies because of 'our shared commitment to open economies, encouraged and assisted by our mutual willingness to invest in one another's ideas. Just as it is the case in investment, it is also the case with trade. Openness is better.'
So what is the fascination with the US, given that so many companies have found the transatlantic trip less than rewarding (see box)? A superficially common language, a much bigger market than Britain's and the pound's return to its highest levels since 1992 seem to be the main factors. But each have hidden dangers.
'I suspect language has a lot to do with it,' says Bob Semple, senior strategist for NatWest Securities. 'British companies think they understand American English. They also see it as a growing economy, and one of the biggest. It's easier to take things over in the US than in continental Europe, while Japan and the Far East have a completely different culture.'
Nigel Stapleton, Reed's finance director, who lived in the US when he was with Unilever and now spends a third of his time there, agrees with the language point - but then, words are Reed's stock-in-trade.
'A key element of our strategy is the English language,' Mr Stapleton says. 'Language is an important market-differentiating factor for us, and the US is the largest English-language market in the world. Secondly, we are first and foremost an information publisher, and the US is the most sophisticated information-using market in the world. Thirdly, it is the most computer-literate market in the world, and the most advanced in its uptake of electronic publishing.'
Reed's latest US buy, Mead, is an electronic publisher of general and legal information. The legal angle is important, because America has 800,000 lawyers, all apparently insatiably hungry for reports and documents.
'That is a dollars 2.9bn market,' Mr Stapleton points out, and Mead has 50 per cent of it with a database of 300 million documents.'
In one way or another, it was the size of the American market that drew Reed towards Mead. This has seduced many British companies in the past, some fatally because they have found that a big market can also be viciously competitive. But Mr Stapleton is confident that Reed has taken full account of the dangers.
'We only acquire market leaders,' he insists, 'and the entry barriers are high. Imagine trying to break into the legal database business from scratch and having to load in 300 million documents] On top of that, the cost of information is not a high priority for lawyers, so it is possible to get good profit margins.'
If this sounds like a strong defence, the US has an infinite capacity for tripping up the best-laid plans.
'It's a jungle that's up to 6,000 miles away,' says Robert Heller, widely respected management and business commentator, whose books can be found in shops on both sides of the Atlantic. 'Beware the strategic knee-jerk, where a UK company argues that the US is the biggest market in the world so a small piece of that will be better than a big piece of the British market. It's a long way away and you cannot manage from Britain.
'All the pitfalls of acquisitions apply squared in the US, because of the distance. Some executives end up spending hours flying to and fro on Concorde to sort out the problems, and they find they are neglecting their home base. People often assume that an American business is going to be much better run because it's American. But often it isn't, and then you have to put in better systems.'
Mr Stapleton concedes that for all his years in America, he is still amazed at the extent of the differences between how British and American companies tackle problems.
'There is a little bit more of a 'pied piper' mentality in the US than the UK,' he admits. 'In the UK, if people don't have confidence in a chief executive they will express their misgivings, but in the US he can bring down the whole company before anyone will say anything. And British finance directors have a more broadly based commercial background than their American counterparts.'
Mr Heller acknowledges that British business executives often have a better feel for the US market than for the European or Asian. But they equally often fail to appreciate how much of a 'no holds barred' environment America is when the chips are down and local rivals are fighting for their survival - or just to protect their existing patch.
Reckitt & Colman, which proudly unfurled another US deal two weeks ago, found that its 1990 purchase of the Boyle Midway household goods group for pounds 750m was not all it was cracked up to be when it got inside it. The products had not been promoted as well as Reckitt's managers had expected, so it has taken longer for them to get the return on their money they had budgeted for.
'To get the best American management you are in ferocious competition with everyone else,' Heller says, 'and it's a very unrelenting market. It's absolute murder out there, and Brits don't fully understand that. You've got to send your own management out on the spot and hope they can adjust.'
A long-term view and a strong home operation are cited as two vital ingredients of successful transatlantic takeovers by Stephen Murphy, head of mergers and acquisitions in London for the American securities house Salomon Brothers - adviser to Reed.
He says: 'The important thing is to be very sure of the domestic tree before you start putting on foreign branches. But in the UK opportunities to expand are infrequent, and people don't want to be left out.'
Near-Japanese levels of patience characterise most of the successful British companies in the US, from Body Shop to Hanson, BTR to National Westminster Bank. And it looks as if Marks & Spencer is doggedly pursuing the same course, after 20 years of poor results in Canada and what is generally acknowledged to have been too high a price for Brooks Brothers.
One group that does seem to be reaping the fruits of the long view is Sainsbury, which suffered years of criticism over its initial minority stake in Shaw's, the New England supermarket chain. It took four years before it turned that first holding into outright control, in 1987. And only now does it feel confident enough to go big with its Giant deal, which should link up with Shaw's through New Jersey and Pennsylvania, giving it the whole east coast from Maine to Virginia.
Nevertheless, the chairman, David Sainsbury, felt able to say: 'This is very much a first step. We will see how things develop. We regard the North American market as one of the major areas of growth for the group in the future.' So presumably Mr Sainsbury is quietly pencilling in the rest of the east coast, possibly down to Florida.
However long a view Sainsbury and others take, it is hardly a matter of chance that this flurry of deals coincides with the pound hitting dollars 1.60 for the first time in two years.
Reed's Nigel Stapleton agrees with the common prediction that while the pound could go yet higher, this is just a blip in a long-term decline against the mighty dollar. So the chance to get in at what are possibly never-to-be-repeated prices is all but irresistible for any British company with the money - and the spare management.
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