Hamish McRae: After the deals are done, the companies must be run

'Instability will not go on much longer. Soon a calmer period will begin'
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The Independent Online

A new US president, a new century, a new set of technologies that utterly change the way businesses operate - do you sometimes feel things are changing just a wee bit too fast?

A new US president, a new century, a new set of technologies that utterly change the way businesses operate - do you sometimes feel things are changing just a wee bit too fast?

You almost certainly do if you are running an established business. One of the astounding features of the past three years has been the speed at which large, supposedly secure businesses can find themselves losing their identity, and tiny new ones leap to size. Here in Britain we have the example of BT and Vodaphone. BT has seen its share price halved and will be broken up; Vodaphone, which did not even exist 20 years ago, is now Europe's most valuable company. This is not an example of an industry in decline and one that is expanding, where you would expect differential company performance. Both companies are in broadly the same industry: the problem for BT was that it failed to foresee the potential of mobile telephony.

In the US a similarly vicious turnabout in company fortunes has taken place. A bank like J.P. Morgan, a decade earlier the most admired bank in the US, or at least the only one with a triple-A rating, is now allowing itself to be taken over. AT&T is being broken up. Even when companies retain their independence, they change their management. There is the phenomenon of "CEO churn" - chief executive officers are hired and fired more rapidly than at any previous time in history. Miss the market estimates for two or three quarters' earnings and the CEO is out. Miss them again a couple of times and the company is on the block.

The outcome is a world where it is very easy to buy or sell companies but very hard to run them. Question: will the next decade see ever-faster turnover in company ownership, not to mention an even-higher CEO churn rate? Or will the risks involved in making takeovers and mergers be seen to offset the potential advantages and things calm down?

While there is likely to be another three to five years or so of extreme corporate instability this phenomenon will not go on for much longer. Quite soon a newer, calmer period will begin.

Really? Start with the substantive reasons for the churn: deregulation, globalisation and technology. All three have blown a whirlwind through the world economy, and as they have done so, companies have had to respond by changing their own structure. But while these forces will continue to blow, they are past the first, raw gale.

Take deregulation. This has happened at different paces in different industries in different parts of the world. There are still laggards, both geographically and industrially. But we know the nature of the beast. We know how deregulation affects company structure and we know how successful companies respond to it. So the next stages of deregulation will not be as much of a surprise as the past ones. While companies will still need to reorganise, this reorganisation can take place in a more orderly manner. Fewer surprises in deregulation will lead to fewer surprises in company performance. That in turn should lead to fewer forced takeovers and mergers.

Globalisation? Yes of course there is a lot of momentum now and it will continue. European corporate integration has several years to run; the expansion of large European companies into the US also has considerable momentum; there are still global networks to be established in natural network industries such as the telecommunications. But no trend is for ever. Globalisation is already starting to generate opposition, and not just from the protesters at Seattle and Prague. In several industries - retailing, personal financial services - the gains from international expansion are suspect. Cross-border mergers frequently fail. And it is possible that the new communications technologies will reduce the advantages of scale: the spoils will go to the nimble rather than the strong.

Besides, globalisation is no longer a surprise. The economic establishment knows what is happening and understands it. What it does not understand is resistance to it, witness the response to the Danish "no" vote on the euro. As resistance rises, expect some of the drive to put together cross-border mergers to wane.

Finally technology. Technology, particularly in communications, is racing forward at the moment and will continue to do so for at least a generation. But the capacity for technology to surprise is surely much lower than it was five years ago. We know, within broad limits, what will happen to communications technologies over the next decade. What we don't know is what people want from the technologies.

If we can guess what technology can reasonably be expected to deliver, but don't know what people want, the risk/reward ratio swings away from corporate restructuring and towards other forms of co-operation. Instead of needing to own a company, most of the benefits can be obtained by clever co-operation. The really big growth area will therefore not be in technology-driven takeovers and mergers but in framing co-operative agreements and alliances.

And the scope for existing companies to be knocked off-course by technology surprises? That will still exist of course, but there will be fewer excuses, as these new technologies, now still so new, gradually mature.

So while the drivers that have led to a surge in company takeovers and mergers will still run strongly, their impact may paradoxically wane.

In any case, investors are becoming more aware of the risks and more concerned about the lack of benefits. As a result, acquisition-minded businesses will find it harder to maintain shareholder support. The fact, for example, that the combined DaimlerChrysler group is worth less now than the Daimler-Benz group at the time of the merger, will scupper similar deals in the future.

None of this should be taken to suggest that there will be a drying-up of company deals. Sleepy companies will still go into decline, while awake ones will take their place. My point is that the final five years of the past century will be seen as an unusual one - a period when companies became too easy to buy and sell. For the next ten years, expect attention to switch to running companies rather than doing deals.

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