USA: Why US acquisitions fail to pay for British purchasers.

USA: Why US acquisitions fail to pay for British purchasers. - West is the obvious way to go - so many things in common ... language, culture, an open market - all too easy. Helen Kay.

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Last Updated: 31 Aug 2010

West is the obvious way to go - so many things in common ... language, culture, an open market - all too easy. Helen Kay.

The old adage "Marry in haste, repent at leisure" is one that British business would do well to recall. A few years ago the fashion for cross-border mergers and acquisitions led many a would-be international player to embrace an American bride with an ardour that most must now be regretting. Indeed, the corporate wedding bells which peeled out for Ferranti, Saatchis and Beazer, to name but a few, have on occasion sounded more like their death knell.

Brought to its knees by post-nuptial evidence of fraud, electronics group Ferranti is struggling to survive its acquisition of the US-based International Signal and Control in 1987. ISC's £215-million sting embroiled the company in costly litigation from which it is unlikely to see an early recovery of its money. Saatchis, once the wonder stock of advertising, has just had to sell off its Berkeley Square headquarters and retired to humbler premises to lick the wounds inflicted by an over-ambitious US expansion plan. Beazer is in even worse condition. Britain's fourth largest housebuilder concluded its turbulent courtship of Koppers in 1988, with the acquisition of the US aggregates business for a princely bridal price of $1.7 billion.

It was, as Terry Upsall, chief executive of CHB (the British and European operation), drily observes, "a bridge too far". Today, overburdened by debt, the family firm which Brian Beazer inherited from his father, is about to forfeit its own independence. An agreed £351 million bid will see Beazer join the Hanson firmament and reverse its role in the food chain: the predator turned prey.

But, as the death bell tolls for Beazer, Hanson's renewed takeover interest, first intimated by its stake in ICI earlier this summer, should also be setting off bells - of the sort that register alarm.

It comes at a time when BTR has just launched a hostile £1.5 billion bid for Hawker Siddeley, having snapped up Rockware for a mere £197 million. Williams has launched a similar megabid for Racal Electronics at £705 million and Wassall, the Hanson lookalike run by ex-Hanson managers Chris Miller and Philip Turner, has successfully secured the American DAP for £54 million. The financial engineers, with cash in their wallets and targets aplenty, have moved in to mop up the victims of vaulting ambition or recession.

After the long dry season of the last few years, the stock market has greeted this latest round of megabids with jubilation, anticipating a return to the glory days of the late 1980s. It's a premature, but not altogether unreasonable assumption: where Hanson and its cohorts lead, many a company will follow, albeit minus the financial acumen which distinguishes its models. Once liquidity is restored to pre-recession levels, then we may indeed be plunged into a new round of M and A mania.

Should Hanson's acquisition of Beazer prove the swallow that presages the summer, there are plenty of grounds for concern. M and As are a risky business even when local; a good half come unstuck. The risk is still greater when the target company is distanced by miles and culture from the would-be buyer. Yet, for Britain, locked as it is an island economy, going west remains the most logical way to expand. As John Thornton, head of European M and A at Goldman Sachs and himself an American, observes, "The US and UK are the only two truly open markets." Their economic affinities are paralleled by cultural affinities. US and UK executives feel more at home in each other's countries, where they don't have to grapple with too foreign a tongue.

For all these reasons Anglo-American marriages have historically dominated the M and A scene. According to Thornton, in the mid-1980s America accounted for 80% of all M and As, and Britain for some 70% of M and As originating within Europe. These proportions have shifted to 50% and 30% respectively, but the slump seems at last to be bottoming out. The latest figures from Acquisitions Monthly show that though activity is still way down on last year (77 buys at $1.8 billion compared to 143 at $7.8 billion at the nine month mark in 1990), UK acquisitions in the US are "showing a third quarter rise" in numbers, if not value. Between July and September 1991, 32 companies forked out a total of $576 million to take transatlantic partners down the aisle. On past showing and future possibilities then, it seems clear that British business must learn from its previous mistakes or be doomed to repeat the last decade's bungled buying spree.

One of the most obvious, and frequent, causes of failure is, as Thornton succinctly remarks, that "you're fishing in the wrong well." There is, he adds, "some correlation between unsuccessful companies and those for sale". Midland's disastrous acquisition of the Californian-based Crocker National Bank is a case in point. Rejected by Walter Heller, its first choice of bride, the bank bought Crocker for $825 million in 1981, only to discover months later that Crocker's main customer base of farmers and developers was rapidly going bust. A hefty portfolio of third world debts completed the fiasco and in 1985 Midland sold Crocker to Wells Fargo for $1 billion. In a West side story costing some $2 billion so far, Midland continues to shoulder the burden of the dud loans it acquired.

Even when both target and bidder are individually successful, however, there is no guarantee that the marriage will work. All too often either optimism triumphs over realism in assessing the strategic benefits and synergies of a possible merger or, worse, the buyer simply hasn't done his homework.

With an enviable reputation on its native turf, Marks and Spencer identified the no less respected Brook Brothers as a transatlantic target. Yet the folly of harnessing an elite East Coast operator to a middle-market food and fashion chain should have been apparent from the first.

Contrast the M and S acquisition with Sainsbury's purchase of Shaw and it is clear just how badly Marks lost its spark. Sainsbury's picked a North Eastern family-owned firm of grocers who themselves walked the floor. A minority stake with reciprocal rights ensured Shaw's co-operation and an interval in which to iron out the problems. When Sainsbury's finally made its move, it had the experience and expertise to realise the benefits which have so far eluded its rival.

Turner likens the acquisition process to buying from a secondhand car salesman. At Wassall, he observes, "We'll go round kicking the tires to see if something's in good nick." Should the target look right, he and Miller will proceed with caution, ready to pull out until the very last minute. "They (the merchant bankers and lawyers) always tell you the bad news after you've sunk too much money." Miller adds, "Christ, that's £2 million down the Swannee, you think." But the strength to cut your losses is, he implies, better than cutting your throat.

If the preliminary research is vital, so is the final price. Terrified of being omitted from the bridal shower, the wooers and wowers of the late 1980s jacked up prices to ridiculous heights. The problem, as Turner notes, was particularly acute for the strategic players, since the targets they stalked were equally attractive to rivals also hellbent on growth. Where the financial engineer could roam relatively freely, the strategic buyer was restricted by the constraints of commercial coherence. The resulting auction did much to damage its balance sheet.

Beazer paid way over the odds for its American presence. The same is true of Blue Arrow's $1.3 billion bid for Manpower. In fact, Tony Berry's ambitious acquisition of the much larger US employment agency resulted in a divorce settlement of which Ivana Trump might be proud. Manpower has regained control and returned the group to the US, having sold off large chunks of the original Blue Arrow business and pocketed the revenue.

Such flagrant instances of over-payment are easy to identify. In general, however, the value of an acquisition is harder to estimate. Hidden costs like the $300 million environmental clean-up bill which Beazer inherited from Koppers may obscure the real price tag. Cultural discrepancies in measuring value compound the difficulty. British companies tend to be guided by the price/earnings ratio.

Other countries use different criteria - sales figures, for example. Moreover, as Thornton observes, "You get a significant disparity between the value that a local stock market places on a company and that which another stock market attributes to it. Many companies," he concludes, "have paid what seem like unrealistic prices for an acquisition."

Of course, strict financial returns are by no means the only criterion for success. As John Cutts, Samuel Montagu's director of European M and A, remarks, "Strategically, the GrandMet-Pillsbury acquisition makes a lot of sense"; this despite the fact that at $5.75 billion GrandMet paid some $20 a share over the trading price.

But even when price, place and timing are right, the one thing that has brought down many an Anglo-American M and A, says Thornton, is a "reluctance to impose its own successful formula, whatever that is". Timid of insisting on the very changes which it first identified as a way of adding value, the bidder will defer to the incumbent management rather than clean house. GrandMet may well have paid too much dough for the dough boy, with its Burger King poison pill; however, one thing it indisputably got right was the management of the management it acquired.

Clive Strowger, former finance director and one of the people who masterminded the deal, launched a massive PR campaign on "going into the heartlands of the Mid West". It was intended to show that "we weren't hairy-arsed predators, we were pretty nice Brits." Nevertheless, the PR in no way distracted GrandMet from its primary goal. "The key thing," Strowger says, "is to ensure from day one that the change of ownership is made known and in the nicest possible way you enforce your standards."

The need to deal firmly with a new acquisition is reiterated by Miller and Turner, though Cutts adds an important qualification. In the US, he agrees, failure to enforce one's culture is seen as a sign of weakness. But on the Continent, where the management control issues are more fuzzy and hostile occupation is a more recent memory, greater tact is required.

Cutts faults the British for their colonial mentality. Could UK companies come to terms with power-sharing, he argues, alliance with an equal might be better than acquisition of a smaller concern. Cutts is unusual in emphasising joint ventures over M and A. A 50-50 split is something which Turner frankly admits he "would avoid with the biggest bargee's implement around." However, Cutts' point is that the emphasis on takeovers is a self-limiting factor which could eventually stymy Britain's corporate expansion.

The importance of effective intervention is particularly great when the M and A is fuelled by borrowings. As Alan Peacock and Graham Bannock observe in their recent book, Corporate Takeovers and the Public Interest, "Highly geared takeovers may, if post-merger performance is not improved sufficiently to service the debt, threaten the survival of previously viable business." Britain's casualties certainly testify to this truth: Lowndes and British and Commonwealth on the home front; Beazer and Blue Arrow abroad.

But a second and less palatable form of intervention may be equally imperative. It is no surprise that some of the recent victims of Anglo-American expansion have been headed by forceful individuals whose ambitions might better have been served by being held in check. A strong non-executive presence is vital, Thornton argues, to intervene prior to a potentially devastating M and A. Sadly, UK non-executive directors, and their transatlantic counterparts for that matter, have tended historically to be insular, lacking both international perspective and frequently the resilience to oppose the whims of a formidable managing director.

The British personality cult has a second manifestation; the tendency to personify a company. "Once you do that," observes Thornton, "it's a whole lot easier to fall in love with it." Stock market adulation of the conglomerates is one such case. The City's romance with Hanson has led to uncritical headlines upholding it as a model of how to do business Stateside. Yet the illustration may not be as apt as it initially appears. Cutting costs and disposing of unwanted assets does nothing to increase turnover; to liberate money isn't always to make it.

As the recession appears to be drawing to a close and the prospect of a Conservative victory remains a distinct possibility, though by no means a certainty, we can expect to see the current grip of credit restrictions being loosened. But any company which is presently casting envious eyes to the west would do well to study the precedents. The conglomerates themselves may not provide an entirely appropriate example.

How much less does the chapter of acquisitions which saw WPP and the Saatchis sink $1.5 billion in their midnight raid on Madison Avenue; National Westminster Bank emulate the Midland mess with its First Jersey foray; and Marks and Spencer have the humiliation of coming a cropper with clothes.

The moral seems fairly clear. British bidders must minimise the risks inherent in M and As by doing their research meticulously and selecting only realistic targets at realistic prices. They must avoid auctions at all costs and have the courage to "just say no".

Should the proposed M and A still pass muster after all these precautions, they must continue to monitor the newly-acquired company and intervene immediately it is necessary. The odd trip on a Jumbo Jet won't be enough; history shows that white elephants are the only result of hands-off management.

DISASTROUS MAJOR UK ACQUISITIONS IN US

Year Bidder Target Bid Value

1980 Imperial Group Howard Johnson $630m

1981 Midland Bank Crocker National Bank $825m

1986 Saatchi Bros Ted Bates Worldwide $450m

1987 WPP J Walter Thompson $550m

Blue Arrow Manpower $1,340m

NatWest First Jersey $820m

Ferranti International Signal £425m

FKI Babcock £416m

1988 Beazer Koppers $1,720m

Marks and Spencer Brook Bros $750m

TVS MTM Studios £180m

1989 WPP Ogilvy and Mather £514m

INTERNATIONAL M AND A LEAGUE TABLE: JAN-SEPT 1991

Adviser Value of Bids ($m) Number

1. Goldman Sachs (1) 17,624 31

2. SG Warburg (9) 17,248 31

3. Lazard Group (-) 15,824 27

4. CS First Boston (%) 13,661 36

5. Merrill Lynch (4) 11,491 17

6. Morgan Stanley (2) 8,841 24

7. Schroder Wagg (3) 7,391 33

8. Morgan Grenfell (2) 4,229 21

9. Lehman Bros Intl (8) 4,062 13

10. BZW (13) 3,810 13

bank has acted as an adviser. Final 1990 figures are in parentheses.

Source: Financial Times Newsletter Mergers and Acquisitions International.

ACQUISITIONS INTO AND OUT OF THE UK: JAN-SEPT 1991

Jan-Sep 1991 1990

No Value £m No Value £m

UK domestic 618 5,188 1,288 14,062

UK into EC (excl UK) 115 848 279 4,522

UK into Europe (excl UK) 12 81 19 177

UK into US 77 1,011 167 4,998

UK into others 41 381 69 1,326

EC (excl UK) into UK 89 2,490 167 5,668

Europe (excl EC) into UK 20 150 31 436

US into UK 39 1,325 47 1,171

Others into UK 36 906 51 6,341

Source: Acquisitions Monthly.

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