And the winner is …
On 12th December, the Financial Times & Mergermarket European M&A Awards were held at London’s Savoy Hotel; this year the panel of experts granted to “M&A Deal of the Year” award to the acquisition of Virgin Media Inc. by Liberty Global Plc.
A report published by Mergermarket and The Storytellers a little earlier this year identified integrating people and culture as the greatest hurdle and most common reason for an unsuccessful merger or acquisition. However, it inevitably takes time to realize whether two companies have managed to integrate and blend in a way that allows a coherent culture to emerge, and in that respect Virgin Media and Liberty Global will be no exception.
Interestingly, the awards granted by The Financial Times and Mergermarket focus on the “deal” rather than the “outcome of the deal” which can only be gauged one year or so afterwards, and ascertained three or more years later. Considering the deal, combining Virgin Media and Liberty Global is indeed exciting, audacious, and has the potential to achieve an excellent outcome. This USD 23 billion deal was handled swiftly, securing the award of best European financial adviser for Virgin’s advisers Goldman Sachs for a second year in a row.
Deal or Outcome, what really matters ?
In today’s world, there appears to be more interest in the deals than in their medium and longer-term consequences, and yet it is clearly the latter that matters to shareholders, employees and customers, albeit for different reasons.
The magnitude of M&A deals and uncertainty regarding their conclusion provide exciting material for the media to report and capture the attention of audiences who will follow the developments of an M&A deal with bated breath to its conclusion. Capturing the same level of interest with an article dissecting the value creation (or lack thereof) of a merger or acquisition that occurred five years ago is a harder task, unless it is about a saga of monumental proportions, such as the Daimler Chrysler fiasco, of the tumultuous HP Compaq integration.
For the seller, the deal is also where the buck stops. Sir Richard Branson and Virgin Media’s other shareholders have very good reason to be pleased about the outcome of their deal, having cashed in an estimated 24% premium compared to the valuation of their shares prior to news of the deal reaching the markets. Off-setting Virgin Media’s £ 2.6 billion carried over losses against future earnings of Virgin’s business will also generate significant tax savings in the coming years. So yes : an award-winning deal by all standards for Virgin’s shareholders. But what about the other key stakeholders in this deal : Liberty Global shareholders as well as the employees and customers of the combined entity, to whom Mike Fries, President and CEO of Liberty Global had announced “This is a great day for customers, employees and shareholders of both Liberty Global and Virgin Media”?
Creating value out of an award-winning deal
On the face of it, the acquisition of Virgin by Liberty makes logical sense from the perspective of scale: the combined group serves 25 million customers located mainly in 12 European countries; that leap in growth will secure some procurement savings from their equipment suppliers but is insufficient to turn the market upside down and to justify the price Liberty paid to acquire Virgin. So where is the Holy Grail in this deal?
Not much in the deal for customers
In presenting the benefits of the acquisition (to investors), Liberty mentioned the rising prices of broadband services in the UK. Clearly, any benefits arising from economies of scale will not be passed on the customers. This is not surprising, since any attempt to do so would spark off a costly price war against some sizeable competitors.
In terms of technology improvements, there is not much for customers to anticipate: historically Liberty Global’s levels of capital investment have been significantly lower than those of Virgin Media. Service improvement resulting from technology enhancements are likely to be prompted by having to keep up with competitors rather than being led by Liberty Global.
What about investors and employees ?
A lot of the essence of what Liberty Global intends to acquire and develop results from the spirit of innovation which typifies the businesses set up by Sir Richard Branson. Virgin Media innovated and changed the rules of its market both in terms of pricing (introducing early subscription to attract new customers) as well as in selling bundles of services. Virgin also innovated by growing as a mobile virtual network operator, securing first mover advantage in striking good deals with established network operators.
Applying a similar approach to other European markets, made easier by Liberty Global’s presence across the continent, could in principle generate excellent growth for the new combined group.
Consequently, the true value of Virgin Media rests with the know-how and spirit of innovation of some of that company ‘s key players, which explains why the headquarters of the new combined organisation will move to the UK. However, as MergerMarket who crowned this deal as best European deal of 2013 also report that blending business cultures is the hardest part of a post M&A integration, how will those key individuals, and more importantly the effervescent energy which prevails in Virgin business, resist being diluted and ultimately vanishing within the broader context of the combined entity?
Let’s hope that Liberty Global’s cable tycoon John Malone does not think that moving the business’s headquarters to the UK will suffice to keep that spirit alive.