Outlook: Living with visionaries

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The Independent Online
Hostile takeover bids rarely deliver value to shareholders in the company doing the bidding. This is well researched and well known. Because the acquirer is forced to pay a premium for his target, most if not all the value created by the merger tends to get eaten up by the acquired.

Most managements have taken this truism on board, and despite the best endeavours of investment bankers, whose fees rise exponentially when a transaction goes hostile, tend as to avoid contested takeovers wherever possible. Merger mania these days is characterised not by the swashbuckling, financially engineered takeover battles of the 1980s, but by agreed, no premium strategic get togethers.

All of which would make it very difficult for Glaxo Wellcome to go hostile against SmithKline Beecham, as some in the City are urging it to. If Glaxo was forced to pay a bid premium, it might end up giving all the benefits of the merger away to SmithKline Beecham shareholders. There would be nothing left in it for Glaxo. On the now unagreed "friendly" merger terms, for instance, a premium of just 10 per cent would be worth pounds 5bn. A more usual bid premium of 20 per cent would mean pounds 10bn of extra value going to SmithKline Beecham shareholders.

Glaxo doesn't employ Sir Richard Sykes for him to work for SmithKline shareholders. Plainly it wouldn't be worth his while to go this route. There might, however be another way of salvaging the pounds 13bn of value that was wiped from the two companies' share prices when the merger talks collapsed, and that would be for Glaxo to go hostile with the original no premium bid terms.

If this is as good a merger for both companies as the City seems to think, why not just allow Glaxo to takeover Smith Kline on the original terms, sack Jan Leschly and his team, and let Sir Richard inject his own managers and culture through the SmithKline organisation. With one bound, the issue of who runs the show, if that were the problem, would be solved.

Such an outcome would not on the face of it be of any less value to SmithKline shareholders than the originally agree terms. The obvious riposte to this is that Mr Leschly would fight it, or find a white knight prepared to bid more. But if Mr Leschly can demonstrate that there is more value in alternatives, then he should never have agreed the Glaxo merger terms in the first place.

The logic suggests that Glaxo is in with a chance - that it could go hostile on a no premium basis and still hope to win. This, however, is not what is going to happen. The argument may be intellectually sound, but in the real world it doesn't work that way. And there are good reasons why it doesn't. The chief executive can never be the whole company in large successful organisations like Glaxo and SmithKline, but he is a vital part of it. It is his (or very occasionally her) competitive instinct and vision that drive it forward.

Investors cannot expect successful managements just to stand aside and let their tummies be tickled just for the sake of supposed shareholder value. Until the world is run by machines, personal and cultural incompatibility are always going to stand in the way of mergers, however compelling their industrial logic. Nor in the end would investors have it any other way. For without these mad, driven, usually autocratic visionaries, their companies would be nothing.