Takeovers grab headlines. They also often reflect the prevailing tone of the business environment. The year just ended was not only a record one for takeover activity in the UK. A high proportion of these acquisitions were driven by the potential for reducing costs: put businesses together and increase competitiveness was the theme. Glaxo acquired Wellcome in the largest-ever UK takeover. In other sectors, such as financial services, the corporate landscape changed dramatically on both sides of the ocean, with the Chemical Bank-Chase Manhattan merger in the US and Lloyds Bank's acquisition of TSB in the UK.
This makes the first major bid to be resolved in 1996 so fascinating. Granada's proposed acquisition of Forte runs contrary to the current perception of what takeovers should be about. It is viewed as a battle of management styles and strategies. The focus is on personalities and what an individual chief executive can do for a company.
Warren Buffet has identified the two most important tasks of the chief executive of a quoted company: one is to motivate employees, the other is to allocate capital appropriately. To accomplish the latter he or she needs to understand what capital the business has, what capital it is generating and what capital it has access to. Before deploying this capital he needs to consider all the options, including that of returning it to shareholders.
Those who have worked extensively in a particular industry should have a head start in the latter task, but they often throw the advantage away. Sometimes they don't realise that they have a decision to make. Sometimes they get too close, or too sentimentally involved, to do the job properly. Sometimes they are just not very good at choosing where to place the capital. At this point they run the risk that shareholders, if given a choice, might prefer someone else to manage the company, even someone with less knowledge of the business background.
For a long time, absurd accounting practices allowed acquisition-driven companies to make it appear that they were better than previous incumbents at allocating capital. The sterling work of Sir David Tweedie and the Accountancy Standards Board has thankfully changed that. But previous abuses should not obscure the underlying principle: those who have proved themselves good allocators of capital in the past will enjoy shareholders' backing against those who seem to have failed in this area.
Takeovers which are propelled by the desire to drive out inefficiencies are unlikely to lose favour in 1996, but they do have the feel of a cyclical fad. In contrast, companies with an indifferent record of managing assets will always be fair game for predators from outside their industry. Chief executives will be reminded of this fact if Granada wins Forte.