Carphone Warehouse and Dixons: Is this a merger of equals or a signal blackout?
As the two companies cement their merger, Alex Lawson offers lessons from past unions
Thursday 15 May 2014
Dixons and Carphone Warehouse have announced an all-share ‘merger of equals’ as the high street giants aim to build a multi-billion pound electronics business.
However, a till roll a mile long would be needed to document retail's disastrous unions, including those on Carphone founder Sir Charles Dunstone's CV. A close look at those painful partnerships offers Sir Charles and his counterparts at Currys PC World some pointed warnings.
Don't bet heavily on trends
On launching a European joint venture with US electronics retail giant Best Buy in 2008, Carphone hit out at competitors, including Dixons. There was considerable bombast to their proclamations of dominance – Best Buy was going to fill a gap in the "big box" out-of-town retail market and Carphone would sell through its shops at home and abroad.
Sir Charles said at the time: "They do something really different. It's unlike any retailing of consumer electronics anyone here has ever seen before."
However, the US giant struggled in the UK, as the custom evaporated online and migrated to a resurgent Dixons; it beat a retreat in 2011, to retrench and battle Amazon's dominance in America. But Sir Charles did profit from it financially.
Manage the egos
Cost savings are usually high on the agenda in any merger as similar organisations combine, but is it worth the seething resentment among management and colleagues that mergers frequently engender?
Higher up the organisation, chief executives usually stay on to fight their company's corner, but the top dogs below them may become disgruntled.
Sir Charles is expected to become chairman and Dixons chief Sebastian James may hold the same role in the new company; but a penny for the thoughts of highly rated Carphone chief executive Andrew Harrison, who is expected to be named deputy chief executive less than a year after taking Carphone's top job after 18 years with the firm.
Michael Hobbs, the former chief executive of clothing retailer Adams and chairman of recruiter Court & Spark Consulting, says: "In most mergers and acquisitions you lose great talent because there is a period of uncertainty – you have to focus on who you want to keep."
Asda's doomed merger with furniture specialist MFI in 1985 ultimately faltered due to its onus on management, according to the retail analyst Nick Bubb. "Asda-MFI was dressed up as an out-of-town site synergy deal, but the merger was really about the management succession at Asda; and it clearly didn't work, given the differences between the two businesses," he says.
Make sure your carrier bags are the right colour
Retail brands rely more heavily than others on loyalty in a crowded market that relies on frequent custom.
Shoppers have a keen eye for the price of ketchup in one supermarket and the contents of another's lasagnes. Two tumultuous acquisitions have defined the last decade of food retail: Sir Ken Morrison's pugnacious £3bn takeover of Safeway by his eponymous chain in 2004; and the Co-op's acquisition of Somerfield. Both caused a cascade of problems.
"In both instances, there was a hideously confusing period from the shoppers' point of view, with the combined entities essentially running two chains with overlaps in marketing, own-label and more trivial stuff such as carrier bags," says Kantar Retail's director Bryan Roberts. "The Co-op is still suffering from indigestion, seeking to dispose of the larger Somerfield stores."
Look at a map
Sir Charles and Mr James will have dug out the atlas to study where they both have shops. If the Competition and Markets Authority steps in to examine the deal, the retailers may have to shed some of their 1,200 stores, as has been the case in major takeovers including Asda's acquisition of Netto in 2010, when the supermarket was forced to sell off 25 per cent of its newly acquired estate.
Kate Calvert, an analyst at Investec, says: "This tie-up is about service, but there is definitely the ability to rationalise their portfolio. Currys has already reduced its estate and Carphone definitely has too many stores."
Fend off the culture clash
A distinctive company culture is vital in retail, from John Lewis Partnership's quasi-communist state to Tesco's hard-nosed winning mentality; it is often reflected on the shop floor. Combining these philosophies, particularly for rivals, can prove to be excruciating.
Kingfisher's merger of B&Q with the French DIY retailer Castorama in 1998 proved an uneasy marriage, against the context of intense City pressure on the former to demerge its sprawling electricals and DIY business. "Anglo-French distrust and cultural issues took a long time to break down," Mr Bubb says.
Kingfisher also attempted a merger with Asda in 1999 that was so unpopular with the City – due to cultural differences – that the latter's price was driven low enough for Walmart to swoop, and acquire it.
Dixons and Carphone appear more closely aligned – they share a central ideology in getting people into shops, to offer them good service amid fierce online competition.
Their locations may also help – the former is based in the Hertfordshire town of Hemel Hempstead while Carphone's head office sits not far away in a slightly dishevelled part of Acton, west London. Sources close to the deal said the merged entity is expected to relocate to a new headquarters on a London Underground line.
Dixons and Carphone may be poised to boot up retail's latest partnership, but will be mindful that they follow in the footsteps of some crushing failures.
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