At this moment we have a burst of merger mania. There has been all the fun over BT's effort to take over MCI, the US telephone company, only to find that profits there were slumping. When it cut the price it was prepared to pay, out popped another US group, WorldCom, with a higher offer.
Much of the activity in recent weeks, though, has been in Europe. We have Guinness, Grand Metropolitan and the French group, LVMH Moet Hennessy Louis Vuitton reorganising themselves in a part-merger and part-demerger of Byzantine complexity. The idea is to create an enormous global drinks group, but the French luxury side has reservations, so it will go its own way: apparently the head of the French chunk, Bernard Arnault, reckons that joining Burger King and Moet et Chandon is "incoherent" and you can see his point.
Then there is BAT, the tobacco and insurance group, proposing demerging its insurance side (Eagle Star, Allied Dunbar, etc) from the tobacco and joining that with Zurich, the Swiss insurance group. You might have thought it odd, even macabre, that a tobacco firm should own a life assurance group; now it seems the tobacco company has come to the conclusion that it wasn't such a good idea after all.
Reed Elsevier, the Anglo-Dutch publishing company, is merging with another Dutch publisher, called Wolters Kluwer, to become the world's largest publisher of scientific information. Again you might think there is little logic in merging British pop magazines and Dutch scientific and legal journalism, but it seems there is.
Meanwhile, last week Barclays Bank put up for sale most of BZW, the investment bank laboriously (and expensively) assembled 10 years ago in response to the City's Big Bang reforms. And already this week, Italy's largest insurance group, Generali, is trying to buy France's second largest, AGF, and Finland's largest bank, Merita, is merging with Sweden's fourth largest, Nordbanken.
All this activity arouses a certain cynicism. What is particularly odd to anyone outside this world is the way in which companies announce mergers or takeovers with a great fanfare, only to demerge in misery a few years later. Why do they do it?
There is a general reason which is that it is very easy. Running a business well is extremely difficult: much harder than most people in the professions and in politics (who I'm afraid are inclined to sneer at business people) realise. What is more, it is getting harder all the time, as competition increases and lead times shorten. But sticking businesses together and pulling them apart has never been easier - or, rather, the financial side has never been easier. There are a dozen investment banks which employ immensely highly-paid individuals whose sole job it is to think up convincing cases for merging or demerging companies and sell these ideas to corporate managements. All you do is hire an investment bank, some lawyers and accountants to do the detail work, and maybe a PR firm to sell the deal and you are in the takeover business.
Of course making a merger work is a completely different kettle of fish. In "people businesses", where the main asset is the brains of the people you take over, there is a disconcerting habit of people to walk. I recall a stockbroker friend whose business was taken over by a British merchant at Big Bang. "What I can't understand," he told me a few months later, "is that they pay all this money for us and then treat us like dirt." Unsurprisingly the merchant bank has itself been taken over by some Germans.
But making a merger work, that long, hard and often lonely slog, is not what investment banks are there for. By the time that it is clear that the merger was a terrible mistake the management has been given its golden handshakes and the bank is 50 deals further on.
Now of course there are legitimate reasons for mergers and I can think of at least three. One is the need for global networks. Any network - a telephone is the simplest example - is worth more the greater the number of people connected to it. Increasingly businesses are becoming global networks: think of hotels, airlines, or indeed investment banks. So there is a logic for international mergers in these areas.
A second is the ability to cut costs. Economies of scale do still exist in some businesses: a lot of the savings from mergers result from the fact that the merged business only needs one head office, but there are also savings in research and development. For example the pharmaceutical firms can consolidate their R&D, probably both saving money and getting better results.
Third, there is the familiar argument that there is a proven, competent management team at ABC company which can really run a business better than the deadbeats that happen to be running XYZ. I suppose XYZ could hire a few of the managers at ABC and that sometimes happens. But often it doesn't, and the most efficient way of installing new management is a takeover by ABC.
Then there are the less legitimate reasons for mergers. One is management aggrandisement. People at the tops of businesses tend to be surrounded by courtiers, and investment bankers are brilliant at flattery. So they can make a mediocre chief executive feel wonderful by getting him to announce some decisive takeover. Study the pictures of executives at takeover time: they usually look pretty pleased with themselves, don't they?
What does this mean for the rest of us? Even legitimate mergers usually mean fewer jobs, for that is what rationalisation means. The answer is very simple. Big companies almost invariably shed labour, while it is tiny companies that create jobs. Anyone working for a large company has to work on the assumption that his or her division (or even the whole thing) will be sold to someone else. So everyone must plan to be nimble: ready to walk. It is much safer to have saleable skills, or better still a portfolio of private work alongside the day job.
The best companies do train their people, do try to develop careers, do try to be genuinely good employers. But in the Velcro world, even good employers sometimes get taken over by bad ones. Loyalty to the firm? In the words of the head gilt trader in Michael Lewis's tale of City life in the 1980s boom, Liar's Poker - "You want loyalty, hire a cocker spaniel".Reuse content