What Genghis has to teach us about mergers
Jeremy Warner On why the City is wrong about the Glaxo Wellcome merger with SmithKLINE BEECHAM
Saturday 28 February 1998
Pope to Khan: "You are a sinner of the worst possible kind and I am hurt to my very soul by the damage you are causing. However, if you come to Rome and repent, I can offer you the gift of baptism, redemption and ever lasting life".
Khan to Pope: "I do not understand what you are saying. As head of this great dynasty, I am already descended directly from God. In any case, having studied all the world's major religions, I find one very much like another. However, if you come to my court and worship at my feet, I promise not to sack Rome and not to slay you, as I have slayed others".
I cite this story to make a point about personal and cultural incompatibility, of which we have read much this week with the breakdown of the planned merger between Glaxo Wellcome and SmithKline Beecham.
There was a time when the Holy Roman Empire and the Pope deliberately courted the Mongols as allies against Islam. An alliance of interest was proposed, in effect a merger. It is not hard to imagine how in the corporate parlance of today this might have been sold to sceptical chieftains and cardinals. Just think what we could achieve together, the Pope might have said. Combine your military might and unrivalled administrative skills with the unifying force and commanding spiritual power of my religion and we'd have a world beater of truly global proportions.
It was never to be. The great Khan believed himself directly descended from God, a proposition the Pope could never accept, even though it was not dissimilar to that of his own as Christ's vicar on earth directly descended through apostolic succession from St Peter the Apostle. When it came to slaughter and pillage, the two probably had more in common than the Church would like to admit. But fundamentally they were different. The Church saved its wrath for Muslims and heretics. The Mongols made no such distinction.
Culturally and personally, then, the two empires - the one spiritual but with a heavy hand on the secular, the other entirely secular - could never ally themselves. Culturally they were too dissimilar, and personally their titular heads occupied positions pretty much identical to each other. "If I'm emperor, what does that make you?", they might have said one to another. In unison, they would have answered their own question thus: "Why, my servant, of course."
I don't want to stretch the analogy too far. For a start it is not clear who, between the Yorkshire grit of Sir Richard Sykes of Glaxo, and the go getting determination of Jan Leschly of SmithKline, would best be cast as the great Khan. No doubt both would regard it as insulting to be passed over and assigned the role of Pope. But plainly we can learn something from the parallel. In the City, the collapse of the merger talks is widely blamed on a clash of personality, on the inability of either to accept they should play second fiddle to the other. Outrage! How dare these people let their egos get in the way of all that shareholder value, everyone says.
But actually, in truth, is this not just the way of the world? Is it really possible for big, successful, autocratically run corporate empires to be merged on agreed and equal terms? Or are the cultural differences and the fact that invariably both bosses believe themselves and the corporate model they have created superior to the other, obstacles that are just too big to surmount. In the City no obstacle would be deemed large enough to stand between the investment banker and his fee. Ask him to knock down Everest and he would attempt to do it. But whether these mega mergers are either in the public interest, or the longer term interests of shareholders, is a different thing.
The arguments in favour of big consolidating mergers are well rehearsed. Essentially they are to do with scale, cost cutting, and the enhanced market clout of the larger organisation. In pharmaceuticals there is a separate "gee-whiz" technology justification tacked on. At its most basic, this is simply to do with the enhanced prospect of drug discovery and development that a larger research and development budget brings.
But it also has to do with the rival technologies that different pharmaceutical companies are developing. SmithKline is considered strong in gene identification technology, or genomics, and has invested heavily in it. Glaxo's great hope for the future is its investment in combinatorial chemistry. Both technologies, it is said, offer the prospect of a quantum leap in drug discovery, development and healthcare. Put the two together and the combination would be unbeatable.
The trouble is that nobody knows whether this proposition is true. The best guarantee of consumer choice and interest is nearly always competition and diversity. To believe this is reversed in the case of pharmaceuticals, and that it is hegemony that is capable of producing the best result, is to suspend the accepted laws of economics.
The public interest is one thing. What about the long term interests of investors? These things can be made to work, and to generate value. Both SmithKline Beecham and Glaxo Wellcome are themselves the result of successful mergers. What tends to happen in the successful merger, however, is not a coming together and mixing of two corporate cultures, but a subsuming of one by the other. The financial terms of the deal may justify the description merger, but in practice what is occurring is a takeover. The laws of natural selection reign, and a dominant species emerges.
What seems to have happened with Glaxo/SmithKline is that Sir Richard took it into his head that Mr Leschly's centralised way of running things with its rigid lines of reporting and responsibility (the SmithKline corporate model in other words) was wholly inappropriate for Glaxo. Since Mr Leschly was to be chief executive of the combined company, this was obviously going to be a problem. You can call that ego, if you like, but plainly it is reflective of more fundamental differences. If the next few years was to be spent in factional infighting and scheming, the merger would have ended up causing more harm than good to shareholder value.
The City still wants this merger to happen. The solution would seem to be, then, to get one company to take over the other - to bring about a situation, as it were, where Genghis Khan is allowed to sack Rome. Since these days investors don't on the whole approve of hostile takeovers, with the bid premium they invariably involve, the battle would have to be fought on neutral terms. The choice would not be the usual one of accepting an offer or rejecting it, but between two opposed management approaches.
That choice could be put either directly to institutions, many of which own shares in both companies, or more practically it could be made by non executive directors. Better still, the two companies could decide to call it quits and go their own separate ways. Some mergers just aren't meant to happen.
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