Outlook: A deal that smacks of management ego

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The Independent Online
SIR GEOFFREY MULCAHY, chief executive of Kingfisher, does like a deal, doesn't he? Everyone else is busy dismantling the conglomerates of yesteryear, but Sir Geoff seems intent only on building up a new one. And strangely enough, the City seems to like the idea.

Admittedly Sir Geoff is confining his ambitions to retailing, but what a hotch potch of different retailers he's assembling - Woolworths, Superdrug, the B & Q and Castorama DIY chains, Darty, an French electrical retailer, and now, if all goes according to plan Asda as well. Is the City right to be backing this curiously unfashionable adventure in retail diversity.

The test of any merger has to be whether one and one adds up to more than two. Just occasionally there are good defensive reasons to merge which might justify a dispensation from this test, but such cases are usually pretty desperate ones.

To his credit, Sir Geoff has so far proved himself reasonably adept at managing businesses across the retail sector, despite a wobbly mid term patch when he had to sack his friends and split his role in order to remain at the helm. On the other hand, it is not readily apparent that Asda needs much in the way of management. Its recovery from basket case is now fully complete and it is now well established in third place in the supermarkets league table.

Plainly there will be some buying power benefits to be had, but because these two companies are in different areas of the retail market, they are unlikely to be significant. Cross selling opportunities are also likely to be quite limited in scope, at least in the short term. So what's the point of this deal?

Eventually there will be a succession problem at Kingfisher. Sir Geoff has a few good years left in him yet, but there is no obvious successor. Still in his early forties, Allan Leighton, chief executive of Asda, would provide a top drawer replacement. However, a company's need for an heir apparent is not in itself a good reason to merge.

Simple observation tells you that big companies are always fatter and less efficient than smaller ones, but plainly there are some advantages in size for the sake of it. From buying power to cost of capital, large companies have a quite considerable competitive advantage over smaller ones. It is very much Sir Geoff's view that the increased price transparency and enhanced competition of European retailing caused by the single currency means that size will become all important.

Once again, however, it is questionable that bringing together a number of very different retailing formats to produce that size brings about the economies of scale Sir Geoff seeks. Nonetheless, in terms of market capitalisation, Kingfisher will end up bigger that Marks & Spencer, Sainsbury and Tesco. In terms of sales too, Sir Geoff will be up there at the top.

That's quite a badge to wear on your lapel, but whether in the end this merger does any more than provide an antidote to management boredom, or indeed really amounts to much more than the pursuit of prestige and size for the sake of it, is open to question. It seems unlikely the City will oppose this marriage, but the betting must be that 10 years down the line the merchant bankers will be earning their fee for the second time round - by dismantling this grand folly.

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