mergers, demergers, acquisitions

The sudden collapse of the planned mega-merger between Glaxo Wellcome and SmithKline Beecham sent a frisson through stock markets. Some observers saw the breakdown as a sign that the great merger wave was ending: bad news for financiers who both battened off enormous fees and saw their merging investments boom. Soaring share prices long ago lost contact with theoretical norms of stock market valuation: but a takeover bid or merger isn't theory - the money is on the table.

The tidal M&A wave, moreover, has boosted the shining new cause of enhancing 'shareholder value'. Management after management has adopted this new battle-cry as sovereign aim. The concept, really sophisticated jargon for a rising share price, is thus today's pet justification for mergers and acquisitions. Either a company raises its market value by intelligent choice of strategy and tactics, or higher value is won by M&A deals that unlock the true corporate worth.

That can be achieved by attracting a premium-priced bid; or reshuffling the business portfolio - selling here, buying there; or purchasing missing strategic pieces: or amalgamating forces. The latter strategy lies behind the biggest deals. Top corporate managements believe that scale will decide the strategic wars of the New Century. Big is not big enough. Huge is better - not only for the company, but for top managers themselves. Their egos and their pay packets alike are fortified by the super-deals.

Another abortive merger - between accountants KPMG and Ernst & Young - emphasises the point about scale. No stock market interest was involved, but the two practices, already of vast global dimensions, believed amalgamation necessary to compete with the Arthur Andersen empire and the new Price Waterhouse-Coopers & Lybrand combination. The merger (like Glaxo-SB) failed not on strategic grounds, but over practical, human problems in putting two and two together.

Do they ever make five? The initial synergies are often mouth-watering. By cutting out overlaps (and people) the thwarted architects of Glaxo-SB planned to save £1 billion. Glaxo's earlier buy of Wellcome produced major savings, as has the Ciba-Geigy union (renamed Novartis). But one-off savings are not the major objective of strategic combinations. The drug companies, for example, claim that unions will strengthen their ability to create and market billion-dollar drugs.

For that claim, the evidence is scant. Both Glaxo and SB created enormous riches from anti-ulcer drugs developed long before Glaxo bought Wellcome and SmithKline united with Beecham. The much smaller Swedish firm, Astra, with its anti-ulcer drug, Losec, outdid both giants. Its head, Hakan Mogren, even professed incomprehension over 'why some of these mergers have been done' - and some research by consultants A.T.Kearney seems to add to the mystery.

The decade to 1996 saw $100 billion of pharmaceutical deals. But those bitten by the acquisitive bug fared worse financially than non-acquirers. From 1992 companies like Astra flourished as the 'economic return' of the merger kings fell, to half that of non-acquirers. The research findings aren't final, though. Perhaps the M&A pay-offs are still to come: drugs, after all, take 14 years to come to market, and the new pro-merger arguments are essentially long-term.

They are also evidently powerful. At least, Astra's Mogren, in an abrupt about-turn, has accepted their logic. His company's growth rate has halved from its previous 30%. He observed in March 1998 that, at the previous pace, 'we simply couldn't manage a major strategic move...It was important to make the most of the opportunities we had for organic growth.' His words suggest that mergers and acquisitions are a strategic fallback when other expansion possibilities have lost their lustre.

Mergers also look second-best to demergers: no drug company has created more shareholder value than Zeneca, now worth $25 billion, but once a mere division of ICI (whose own value is a third of its former child's). Demergers work because managers, liberated from the dead hand of a top management whose span of control had grown too wide, can concentrate on a business that they fully understand. The corollary is that mergers tend to fail because they dilute top management's attention and weaken focus.

Every merger study supports this dim view. A typical finding is that, out of 150 unions valued at $500 million or more, 30% substantially reduced shareholder value, 20% did so to some extent, 33% produced midget returns - and only 17% hit the jackpot. But such studies relate to the the past. Today's merging giants claim that times have changed: that deals are far better founded strategically, and that managements truly know how to manage mergers more effectively.

The strategic argument is flamboyantly illustrated by the WorldCom bid of $34.5 billion (5.5 times its own 1996 revenue) for the three times larger MCI. The bid not only scuppered British Telecom's plans to expand into the US via MCI: it established WorldCom as the first communications supplier with real global strength in every sector - long distance, local, and the Internet. There you have today's model merger, a combination that in theory seizes competitive advantage by scale and spread - and saves $15 billion in costs over five years.

The model management for the model merger is also clear. Managers have learnt that you don't pussy-foot around, but crash straight in, setting up task forces galore and hiring consultants to cut out overlaps, unite functions, dispose of unwanted businesses and concentrate activities. These crash programmes work well and, in the best examples, lead to full and lasting integration. However, they are bruising to the people whose jobs are either lost or changed - and the higher the jobs, the less willing the occupants are to undergo change themselves.

On that rock, reportedly, the Glaxo-SB merger foundered. SB's Jan Leschly was happy to be chief executive, with Glaxo's Sir Richard Sykes as executive chairman: but then Sykes fatally preferred to give Leschly's role to a Glaxo man. The great good fortune at Novartis was that both merging chief executives retired, leaving the way clear for new men to create a new company. Total cooperation and collaboration under clear, accepted leadership are essential. Warring partners will ruin the sweetest of strategic dreams - although, of course, the dreams may be ill-founded.

In telecommunications, pharmaceuticals and media, all players have concluded that bigger isn't just better, but indispensable. Paying astronomical prices for each other, they have inevitably pushed up valuations all round. But have the runes been read aright? When Big Bang spurred consolidation in the City, banks became equally besotted with the idea that one-stop financial superstores would dominate the future. All such strategies collapsed, with tremendous losses: banks found the hard way that trading in equities, for example, was not requried to attract rich corporate finance business.

Elsewhere, the recent supreme successes have mostly not been merging giants, but highly concentrated companies like Coca-Cola, Intel and Microsoft, whose buys have been relatively tiny add-ons. True, other superstars, like the above-mentioned WorldCom, have performed astoundingly by using highly valued shares for audacious buys - but those wheeler-dealers are in a different game. So are companies such as General Electric and ABB, whose practised management of diversity has been the key to success.

History teaches that some merging mammoths will lack that key. If they are also pursuing misconceived strategies, disasters must follow. Earlier governments, through their regulatory arms, sometimes saved companies from themselves by barring some ill-conceived mergers and forcing other groups into highly profitable break-ups. Now the signs are that competition policies are hardening after the Reagan-Thatcher softness. Washington's sniping at Microsoft could yet lead to a full-scale attack, and to a stricter approach to aggrandisement in general.

In Europe, Brussels has fired several warning shots across the bows of advancing mergers. The parties to yet another aborted deal, publishers Reed Elsevier and Kluwer, blamed collapse on the Commission's stipulations. There's some suspicion, however, that this isn't the whole story. Increasingly, would-be partners are becoming more nervous as the wedding night approaches - very possibly because the prices, and therefore the stakes, have risen so high.

The escalation has made a $10 billion deal seem almost modest, yet the price-tags will go on bloating. Europe is certain to be an especially lively arena, given that nearly all markets are absurdly fragmented by American or Japanese standards. Everything from transportation to insurance, electronics to retail banking, telecoms to supermarkets, will probably see massive consolidation as boards seek economies of technological and management scale.

A single currency and open borders cry out for genuinely transnational companies, while global business demands added muscle for true global spread. For all the mixed record of the past, and the unproven prospects for the future, mergers and acquisitions will seem the only answer for top managers. Given that their personal ambitions are also served by the super-deals, the competition authorities in Brussels are going to be very busy.