The Business world: Troubles with takeovers are clear for all to see
There are several clear signs that a merger is bound to be disappointing
Wednesday 29 September 1999
There is a lot of academic work on why takeovers and mergers have such disappointing results, but the analysis usually fails to clarify why some work and others don't. The reason is that all mergers are different. Sometimes one management has a better record than the other. Sometimes the merged company can offer economies of scale. Sometimes a takeover is just a cheap way of taking capacity out of the market. Sometimes it is management aggrandisement - and sometimes, I fear, just because directors have contracts which ensure that should a bid come along, they will benefit from pay-offs or by cashing in share options.
So there is no simple way of determining whether a takeover is going to add value for shareholders or subtract it - at least before the event, which is, of course, the time you need to know. But there are several clear signs which shout that a takeover is bound to disappoint, and now that we are to be plunged into a flurry of activity in UK financial services, it might be helpful to set down what these are.
First, beware any merger where it is not made clear which side is going to be in charge. Killer signals are the retention of two headquarters or two chief executives. There is tremendous pressure on companies to avoid the contested takeover, because there is great danger in over- paying for an acquisition. So the no-premium takeover, presented as a merger of equals, is superficially attractive.
The dominant company knows that it is dominant and reckons that after a year or two it will be able to assert itself. Meanwhile, it pretends that it is merely an equal and the management structure seems to reinforce this. It relies on the personality of the chief executive rather than the structure to get its way. But this guarantees conflict and that conflict will ensure considerable collateral damage.
Next, look out for cross-border mergers. If the merged group involves companies from different countries it is more important, not less, that it should be clear who is on top. Cross-border mergers are hard enough to make work even when there is a clear boss, but when national sentiment is involved there is a strong temptation to fudge issues of control.
The best current example of such failure is the Daimler-Benz takeover of Chrysler, where last week, more than year after the deal, the full German authority was at last being imposed. In fact everyone knew at the time of the "merger" that this was going to happen, but for political reasons the German dominance was downplayed. Months have been lost and Daimler/Chrysler has admitted that the financial improvement that the merger was to bring will not now be achieved, at least in the first year.
Third, beware takeovers where the cultures are very different, even when it is clear who will run things. In particular, be cautious when a traditional bureaucratic company tries to take over an innovative entrepreneurial one. Sometimes such deals can work, but the usual pattern is for the most energetic of the managers in the "victim" to clear off at the first opportunity. If they are entrepreneurial they will know how to set up on their own. Classic examples here have been the takeover of City brokers by commercial banks: for example, Barclays carefully fitting together BZW, and then dismembering it 10 years later, having lost a lot of talent on the way.
A fourth warning sign leads on from this: where human capital is particularly important in a business, mergers are unlikely to work unless the key humans are on side. Human capital is important in every business, but in some it is also extremely mobile. Most people do not like their employer being taken over - unless the existing employer is incompetent or dishonest.
So there is always some loss of human capital: some people will leave and some of those will be good. However, if the rationale behind a merger is the consolidation of brands, the extension to a global network, or simple economies of scale, then any negative impact on the people side may be sufficiently small to be overridden by these other positive factors.
This last point is perhaps the most important. Even making allowance for the current fashion to attribute companies' success or failure to their management of human capital, it is almost certainly true that the knowledge, skills, contacts and capabilities embedded in a workforce is more important now than it was even 10 years ago. So mergers which recognise this, working backwards from the skill base of the two sets of employees and fitting the merger to that, rather than forwards from a grand strategic design and slotting the people into the design, are more likely to succeed. Mergers that put people first do better.
Few things can be so galling than paying for a people company and then seeing the best people walk out of the door to a competitor. But it is astounding how many buyers of companies think they are buying the people as well as the less-mobile assets of the company, or even expect the staff to be grateful.
So how, applying these points, might the NatWest takeover appear? Well, we don't know which suitor will emerge as the winner, but it is interesting that no one has suggested that NatWest will be able to retain its independence. In the Sixties, at the time of the merger of the National Provincial Bank and the Westminster Bank it became, briefly, the largest in the UK. The deal was billed as a merger of equals and for many years the two banks retained branches facing each other in the High Streets. Now NatWest is perceived as a managerial failure, ripe to be taken over by a smaller rival.
Come to think about it, the fact that the deal that created NatWest was a merger of equals should have told us it would eventually fail - even if it has taken more than 30 years for this to happen.
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