Lisa Buckingham and Dan Atkinson in London
There were red faces all round at accountancy firm KPMG this week after a report was published disclosing that fewer than one in five takeovers produces any value for shareholders. The consultancy firm was playing down suggestions it had tried to pull the report at the last minute because the findings conflicted with its mission to win big-ticket merger and acquisition (M&A) advice business.
The survey shows a remarkable lack of analysis by the companies in the current bout of takeover frenzy. Although their deals are doing little if anything for investors – the people who actually own the companies – they are clearly doing a lot for executive egos. Some 82% of those surveyed by KPMG regarded the major deal in which they had been involved as a success. But KPMG found that, using its own criteria, only 17% of mergers added value, while as many as 53% destroyed shareholder value.
So what is driving the late 90s merger frenzy, and why is it that companies remain so bad at assessing whether a deal is likely to be rewarding for their shareholders?
One of the factors pushing towards top- dollar takeover prices is the buoyancy of shares. The value of targets is rising but so is the ability to pay, as predators are able to issue highly rated shares. In fields such as telecoms, banking and pharmaceuticals, it is the fashion for gigantism that has produced a rush towards the holy grail of market leadership.
There are technical issues at play, too. 3i made no bones about the fact that its bid for rival Electra was partly motivated by a fear that it would drop out of the FTSE100 index, which usually has a dramatically negative effect on share prices, unless it could keep getting bigger.
Smaller companies too are rushing to “get married” in order to qualify in terms of size for the FTSE 250 list, according to John Kelly of KPMG’s M&A department.
Despite the current enthusiasm, however, history shows that reinvention and innovation are clearly more important than simply getting bigger, particularly in a field which is rapidly going out of style.
Few commentators on the industrial scene in the lead-up to World War I would now recognise Coats Viyella, the textiles group which has just dropped out of the list of Britain’s top 350 companies. It had merged with another textiles giant, Paton, and topped off a period of frenetic corporate activity by combining with Carrington Viyella. At its xenith, it towered above Shell and General Electric.
Conversely, examples of successful reinvention include WPP, the global advertising group, which started out as a maker of shopping trolleys, while EMI, the world’s third-largest music company, has jettisoned more brand names than most of us can think of.
One factor undermining the success of big deals is that the “M” in “M&A” is usually a fig leaf: there have been “only a handful of true mergers ever – most are acquisitions”, according to KPMG’s Kelly. This may explain the “victor mentality” noticeable in post- deal environments, when the stronger partner displays a “not invented here” attitude towards the working practices, personnel and even equipment of the weaker.
The failure to deal with management and boardroom issues ahead of a merger is one of the principal reasons that mergers do not deliver anywhere near the expected benefits, while a refusal to deal with conflicts of culture can also undermine hopes of success – just look at the disastrous acquisition merger of US banks Wells Fargo and First Interstate.
It is noticeable that UK-US deals – still about 50% of all cross-border deals – are 45% more likely than the average to succeed, whereas US-Europe deals were 11% less likely to succeed than average.
One recent example of this has been the remarkably smooth acquisition of Asda supermarkets by the American retail giant Wal-Mart. Their cultures and operating ethos were similar; indeed Asda had already modelled itself on Wal-Mart.
As to why investors continue to tolerate the enthusiasm of their costliest employees – the directors – for M&A activity, given its abysmal record on delivering shareholder value, Kelly suggested too many accepted at face value the boardroom view of merger “success”.
Executives tend to be confident individuals, not prone to probing their own mistakes. Fewer than half the boards of merged companies conduct any proper post- deal evaluation; often the rest seemed virtually to declare the merger a success simply because it had taken place.
And, while the KPMG might not highlight the point, many managements are persuaded of the merits of takeovers by their corporate finance advisers. Too few are prepared to reject their advice.