Patience Wheatcroft

In the best M&A deals, a clever bidder takes over an underperforming company

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Last Updated: 31 Aug 2010
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It is not comprehensive, omitting to mention that the manufacture of yoghurt was to be protected from foreign predators, but the vigour of the response to PepsiCo's mooted interest in Danone is testimony to the fact that the Elysée Palace has sensed that a corporate buying spree is gathering steam.

Britain has long given up the principle of local. The City was quick to succumb to foreign bidders and was then hardly likely to discourage the sale of much of corporate Britain. Yet, apart from those who collect the fees for making the deals, few would contend that acquisitions generally enhance shareholder value. No-one can say what would have happened had these deals not gone through, but plenty of them have failed to deliver on what was promised. Often, this is because they have been shaped as mergers when what was required was an outright takeover.

Avoiding paying a takeover premium can be a false economy because of the pussy-footing and compromise that a merger requires. Look at the get-together of Capital Radio and GWR. Here was a logical step made illogical by the belief that the forceful personalities from the two businesses could work together.

The new name for the combined business was a suitable compromise: GCap Media. But whatever the job titles, two bosses amounts to one too many, and while Ralph Bernard of GWR and David Mansfield of Capital gradually established that the latter would be the loser, it was the business that suffered. If two companies are to become one, a clear leadership structure has to be there from the start.

That is why there are already qualms over the planned merger of Boots and Alliance Unichem. With a 30% stake in Alliance, Stefano Passina is clearly the driving force in the business. As he prepares to join with Boots, the plan is that the latter's Richard Baker will be chief executive of the group, while Passina, whose title is deputy executive chairman, looks after strategy. This crowding of the executive suite is what happens in a nil-premium merger, where both sides want to feel that they are being accorded their share of influence. But the quest to win in a competitive marketplace leaves no room for massaging corporate egos.

The most effective deals are those in which a clever bidder definitely takes over an under- performing company. An obvious example is Royal Bank of Scotland's takeover of National Westminster Bank. Little time was wasted on pleasantries after RBS won control of NatWest as a result of a fiercely contested tussle with Bank of Scotland. The RBS chief executive Sir Fred Goodwin, who justified his soubriquet Fred the Shred with the costs he took out from NatWest, delighted investors as he made the acquisition even more value-enhancing than he had promised it would be.

Do the homework before the deal and move fast afterwards... that seems to be the philosophy of the most successful takeovers, although it is far from foolproof. But the fudge that is the almost inevitable result of a merger makes life difficult for management.

The landscape of the British high street might have been very different if Sir Terence Conran had been persuaded to take over British Home Stores rather than merging it with what was then his Habitat/Mothercare empire. Compromise dictated the shape of the management of the combined group. The man dubbed as a 'design guru' failed to design the perfect deal and the project foundered, eventually enriching Philip Green, who rescued a demoralised Bhs after it had spent a miserable spell on the stock market.

But some of those who were involved in this 1980s dream still ponder how different the end result might have been had Conran dug a little deeper into his pocket and taken over Bhs. Aggressive acquisitions are not necessarily value-enhancing, as Sir Ken Morrison would surely have to admit. But he made his more aggressive than was necessary, dispensing with the talent that might have helped with the integration of the businesses and thus allowing it to defect to rivals. The problems that Morrison has since encountered in joining with Safe- way would certainly have been lessened if Lawrence Christensen had been around to help. Instead, the former Safeway director has been deploying his skills on the crucial matter of distribution for Sainsbury. Making a successful acquisition means being decisive, but setting free the talent to join the competition should also be avoided.

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