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Business case

AB InBev SABMiller logo

Energy and persistence conquer all things (Benjamin Franklin)

After four unsuccessful bids, it is befitting that the deadline set by the U.K.’s Takeover Panel for beer giant Anheuser-Busch InBev NV to submit a fifth and final offer for SABMiller Plc. was extended to 5 p.m. GMT on 11th November : Armistice Day !

Sabmiller-share-priceRumours that AB InBev were about to bid for SABMiller started over twelve months ago, gaining substance shortly afterwards. What ensued was a succession of bids of ever increasing value to seduce the initially reluctant shareholders of SABMiller – until they surrendered to a staggering offer of USD 107 billion, or £ 71 billion. They can hardly be blamed for grabbing the cash and running, given that SABMiller’s share price at the end of November stands 37% higher than it was on 14th September, as a direct result of AB InBev’s mounting bids. Whilst SABMiller’s share owners might drink to celebrate having realised value growth earlier than expected, many other stakeholders are guaranteed a nasty hangover as a result of the forthcoming merger.

The combined business is set to rake in annual revenues of USD 73 billion, which is more than companies such as Pepsico or even Google. But more importantly, the integration of the two companies aims to generate annual cost synergies of USD 1.4 billion, a significant part of which will come from headcount cuts. With AB InBev employing 155,000 people worldwide, and SABMiller a further 70,000, it is easy to imagine how much duplication there will be at headquarter level as well as in many back-office functions. Having paid 15% more to acquire SABMiller than their initial bid of £ 38 per share, there is no doubt the pressure to realise the cost synergies very fast will be extreme.

A foreseeable domino effect on the beer market

Combined-brandsBeyond the USD 1.4 annual savings, much of the business case underlying the acquisition of SABMiller rests on growth in Africa and Latin America. This is because AB InBev cannot expect much growth in Europe and North America where consumers are beginning to seek product differentiation and thereby generating growth at the other end of the beer market spectrum : micro-breweries or so-called “craft brewers”.

Nonetheless, the combined companies’ market share in North America and the fact that AB InBev own wholesale distributors in several states of the USA might be sufficient to restrain the route to market of many smaller players and this may reduce consumer choice in bars and retail outlets; so this could be bad news for those who have thus far developed well by offering consumers something that differs from the usual mass product.

Global market share of five biggest beer companies

Anheuser-Busch InBev – 20.8%

SABMiller – 9.7%

Heineken – 9.1%

Carlsberg – 6.1%

China Resources Enterprise – 6%

Source: Euromonitor, based on 2014 figures

In spite of SABMiller selling its stake in a venture with Molson Coors for USD 12 billion and thereby letting go of the Coors and Miller brands, the combined AB InBev and SABMiller will be selling one in every three pints of beer worldwide, leaving a huge market share gap between themselves and the next player on the podium. Heineken and Carlsberg must now be furiously re-thinking their strategies; a number of other takeovers and mergers will inevitably happen as the industry seeks a new equilibrium.

According to Bart Watson, chief economist at the Brewers Association, there are already rumours about a Heineken and Molson Coors tie-up as these two companies are now seeing their main competitor become even bigger. Others are likely to follow. Some companies such as Diageo, which is now focusing on its spirits business, could stand to benefit from this new wave of upheaval on the beer market by finding an acquirer prepared to pay over the odds for Guinness as the few remaining global players grapple to keep pace with AB InBev / SABMiller. Interesting times ahead…

Africa : two different interpretations of public health

My thoughts regarding the impact this merger will have on consumer choice have not changed since the blog I published in September 2014 (“Something big could be brewing”), but one new aspect which is now surfacing is the very strong opposition and criticism of the merger which is now emanating from public health circles regarding the African continent, which is a critical growth area in the combined company’s strategy. According to Dr Jeff Collin, director of the Global Public Health Unit at the University of Edinburgh, the AB InBev SABMiller merger aims to “exploit Africa’s low per capita consumption of beer” by targeting low income consumers to generate sales growth.

drunk-300x251In an article published in the British Medical Journal, a team of experts warn of “disturbing implications” relating to the growing alcohol related harm being witnessed in low and middle income countries. And therefore the issue is not specifically African, but also affects other regions targeted in the combined company’s growth plans, notably Latin America and China, the latter being the world’s largest beer market in which SABMiller has a joint-venture producing the country’s Nr 1 beer brand, Snow.

Unsurprisingly, SABMiller see things very differently, stating that more than half of the alcohol consumed on the African continent is what they call “informal”, in other words beverages produced in unregulated facilities, ranging from home made beer brewed in a back yard to dubious distilled beverages containing potentially dangerous by-products such as methylated spirits, reminiscent of the Moonshine that was distilled during the Prohibition in the USA. Based on that premise, SABMiller see their mission as a noble task; as per their spokesperson: “The backbone of SABMiller’s growth strategy in Africa is to ensure the affordability of our beers so that local, low income consumers move from drinking poor quality, and potentially lethal, alcohol to enjoying our high quality beers made with local ingredients.”

Many people will consider that strategy to be a little cynical; but there is one undoubtedly positive element in that statement: “local ingredients”. In the beer industry, the supply chain costs can be a substantial component of the value chain because of the unfavourable weight/volume to value ratio. Consequently, unlike wine and distilled beverages, there is a strong incentive for beer to be produced locally. And that, for emerging economies, is better than burdening the balance of trade with the cost of imported drinks.

Money now vs. safeguarding against a possible longer term threat

Beer on tapAs in the more developed economies, low and middle income economies will see a growing tension between the priorities of their public health programmes and the fiscal requirements of their treasury; migrating the production of beer from back yards and speak-easy environments to a registered and regulated business is a source of corporation tax and possibly some form of alcohol tax as well. This also promotes employment in hygiene conscious factories, which is also important in developing economies.

The authors of the article in the British Medical Journal argue that company’s proposed expansion in low and middle income countries “echoes that of transnational tobacco companies” whilst benefiting from less stringent regulation and controls. That might be the case, but faced with the dilemma of choosing between the certainty of a stream of income and the longer term avoidance of a possible health risk, I will not be surprised if the said low and middle income economies will welcome the growth of AB InBev/SABMiller in their respective countries.

Even in the absence of strong political opposition to the merging of the world’s two largest players, implementing the integration of these huge businesses will be a monumental task. Let’s wish them luck (and perseverance), and hope this will not end up with a big hang-over for all those involved. If it does, maybe the other mega-merger which is currently under discussion, namely the USD 160 billion bid by Pfizer to acquire Allegan, will be able to provide the cure to that hang-over!

Similar origins – different trajectories

Ferrero’s bid for Thornton’s marks the end of just over one century of history, as yet another British chocolate household name will be swept up by a foreign group, following in the footsteps of Cadbury in 2009 and Rowntree in 1988.  This will leave the relative newcomer Hotel Chocolat as the only significant specialised independent British owned chocolate manufacturer and retailer.

Thornton shop windowBoth Thornton and Ferrero began as little corner shops; their history is closely associated with their founding families.  But that is probably where the comparison stops.  Whereas Ferrero developed over the years into a formidable marketing machine, a game changer in the chocolate industry, Thornton remained anchored in tradition.  Oddly, it is that traditional image that appears to have attracted Ferrero; the remaining question being whether Ferrero will manage to brush away the “dusty” and “passé” aspects of that tradition, and fully exploit the concept of “authenticity” that underlies tradition.  Given their strong track-record as powerful communicators, transforming the image of Thornton’s is probably not beyond Ferrero’s reach, but it will be quite a task…

Once an up-market purveyor of luxurious chocolates, Thornton’s appears to have dispersed itself over the years, opening its own retail boutiques and diversifying into other categories of indulgent foods, notably ice cream.  In doing so, at no point did Thornton lead or even anticipate consumer trends, thereby missing the shift in taste preferences towards darker and more bitter chocolate compared to what consumers demanded in the 1980s and 1990s, and leaving the door open for the likes of Lindt to occupy that space.

Retail chains – Thornton’s last (and failed) attempt

With sales volumes declining below the critical mass that would be required to profitably run its large Derbyshire plant, and with insufficient cash-flow to justify its large network of retail boutiques, Thornton decided to aim for a step change in sales volumes by entering large retailers, without fully thinking through how their presence in hypermarkets and discount outlets might impact the brand’s already eroded premium image.  Transacting with giants such as Tesco requires a skill set, supply chain efficiencies and ways of working which Thornton appear not to have grasped, and therefore the mass retailer strategy that was supposed to revive Thornton after many years of continued declined turned out to be a failure.

There are only so many successive profit warnings a company can issue before it loses all credibility with its shareholders.  Thornton was getting to that point, and the arrival of Ferrero in that troubled environment can be considered as the deus ex machina  that will hopefully prevent Thornton’s from going into terminal decline.  By the own admission of Thornton’s former Chairman Peter Thornton, grandson of the chocolate maker’s founder, without Ferrero’s offer “The decline in performance would have continued and I think the decline would have been fatal.”

Radical change for Ferrero too

Yes, this stuff really tastes of hazelnuts
Yes, this stuff really tastes of hazelnuts!

The decision to make a significant acquisition to fuel growth marks a radical change in strategy by Giovanni Ferrero, months only after the passing away of his father who founded the company back in the 1940’s and became Italy’s richest citizen.  Until now, the Ferrero empire had grown organically and its acquisitions were focused on increasing production capacity and securing the supply of ingredients: today Ferrero is the world’s biggest consumer of hazelnuts, with 25% of the world’s annual supply used in its production plants. So why depart from such a brilliantly successful strategy?

Ferrero see value in Thornton's where the latter's shareholders had lost confidence (graph source Google finance)
An offer too good to refuse

Giovanni Ferrero argues that the acquisition of Thornton’s will pave the way for Ferrero to rapidly get a strong foothold in Britain, a market where the per capita consumption of chocolate and confectionery in general is high.  However, it did not take any acquisitions for Ferrero to become extremely successful in Germany where the retail scene is harsh and competitive, so why acquire a struggling company to develop in the UK?  Maybe there is an intention to gradually reduce the group’s reliance on Hazelnuts, the price of which has risen steadily in recent years.  That, combined with fluctuating costs of cocoa caused by failed crops and the risk of a global shortage within a decade, means that some diversification may pay dividends over time, branching out in sweets and other types of confectionery.

Seeking the common ground

In the meantime, it will be interesting to observe how the quintessentially British Thornton company will fold into the Ferrero Group which bears the hallmark of its founding family and of Giovanni Ferrero, heir of the Ferrero dynasty, who appears keen to affirm his strong leadership.  Ferrero have stated that the Derbyshire factory will be maintained, but have not commented on how much may change within its walls. However, as the world continues to gobble up ever increasing quantities of Nutella®, Kinder® chocolates and TicTac® sweets, the underused capacity in Derbyshire may be put to good use.

Importantly, no comment has been issued as to where the British company’s management will be located, nor what its remit will be within the Ferrero group.  That was probably wise as it may take a while to determine how much of a shake-up is required to rectify Thornton’s past errors, put the brand back onto a path for success, and use that platform as a Trojan Horse to accelerate the growth of Ferrero’s product portfolio in the UK.

Meanwhile, an imaginative competitor is succeeding where Thornton failed

Hotel Chocolat: a touch of class
Hotel Chocolat: a touch of class

An interesting example that brilliantly illustrates the value and potential of differentiation is the emergence and rapid growth in the UK of Hotel Chocolat since 2003.  Previously named Choc Express (see how some names can project a sense of premium exclusivity and others convey mere convenience), Hotel Chocolat opened its first retail boutique in Watford (not in London’s Bond Street which is more suited to super-premium brand Godiva), and has focused on the premium end of the chocolate market, with strong visual appeal and a packaging that is miles away from the traditional (boring) box of chocolates that can be found on any supermarket shelf.

Thornton's: traditional or "passé"?
Thornton’s: traditional or “passé”?

To further distance itself from mass market chocolate manufacturers, Hotel Chocolat acquired it’s own cocoa plantation on the West Indies island of St Lucia in 2006, on which it opened the Boucan Hotel four years ago.  So yes, there really is a “Hotel” Chocolat and, more importantly, there is a space on the seemingly mature and crowded chocolate and confectionery market in the UK for a new-comer that arrives with fresh, fun ideas and can satisfy the consumers’ desire for self-indulgence.  Hotel Chocolat received the Emerging Retailer of the Year award from Retail Week, and was also nominated as one of Britain’s CoolBrands®, voted for by marketing experts, business professionals and thousands of British consumers whose input was collected by the Superbrands UK panel.

A quick glance above at the illustrations of this year’s Thornton’s and Hotel Chocolat’s summer collections as published on their respective websites leaves no doubt as to which of those two brands has knocked the other off the pedestal of premium chocolate brands.

So what’s next?

As a privately owned company, Ferrero does not need to disclose its strategy to the world, and nobody at this stage can be certain of what is going through Giovanni Ferrero’s mind.  Does he really intend to revive the Thornton brand?  Can the Thornton retail outlets be used as a channel for a premium Ferrero/Thornton range whilst Nutella, Ferrero Rocher and Kinder® products continue to flow through high-street shops and retail chains?  How important are the Derbyshire factory and the know-how of some of its staff to Ferrero’s global manufacturing foot-print?

My many years spent at Diageo, and in United Distillers before that, have given me a number of opportunities to see how difficult, painstaking and costly it can be to attempt the revival of a tired brand.  Tired brands often enjoy a high level of notoriety, and many marketers will see this as a fantastic short-cut compared to the time and investment it usually takes to build any awareness of a new brand. But what if a brand is renowned for all the wrong reasons?  Changing well anchored perceptions can be more difficult that building a brand image from scratch.  If Ferrero manage that feat with Thornton’s, they will again have proved their marketing genius.

Meanwhile, let us hope that Thornton’s decline will not be accelerated by the upheaval caused by their integration into the Ferrero group, and that the latter will not get distracted by this integration to the detriment of its sharp marketing and sales focus.  That will depend on how well the post acquisition integration will be planned and orchestrated.

An uncomplicated deal, for a change


Two years after UPS’s attempt to acquire TNT for 6.8 billion dollars, which aborted as a result of the European regulatory authorities’ opposition, TNT is about to be picked up by another rival: FedEx, but this time for a far lower price tag of 4.4 billion dollars.  So who are the winners and losers this time, and how does this take-over project differ from UPS’s defeat in 2013?  Are the European regulators likely to bark again?

Perfect timing and a good price: good things come in pairs for FedEx

The timing could not be better for FedEx: with the dollar at its highest in years again the Euro and TNT’s share price tempered by declining performance and struggles resulting from its recent restructuring, FedEx is paying the lowest possible price tag for this unique opportunity to leap-frog ahead from its current very weak position in Europe to being in the same league as UPS in a market that continues to be dominated by DHL.  In terms of worldwide revenue, this places the future combined FedEx and TNT a comfortable 20% ahead of UPS.

smiling TNT cargo aircraft
Source :

For TNT, now is probably the last chance to admit that the company has no prospect of getting anywhere by itself in the Americas or in Asia Pacific, and in Europe the gap to the current leaders DHL and UPS is too wide to be closed without an alliance.  Teaming up with FedEx is therefore the best way of saving TNT’s network of 58,000 employees in 550 depots clustered in 19 road hubs, an asset that will allow FedEx to be on par with its key competitors in terms of ground-delivery capability whilst further building its existing international express network.

And frankly, could any TNT shareholder refuse the 32% share price premium offered by FedEx?

So will the regulators jump in and spoil what otherwise looks like a perfect match?  Very unlikely, in fact the European regulators might even welcome FedEx’s move because it is probably the best way to prevent the DHL / UPS duopoly they feared back in 2013 from developing gradually over the coming years.  A market in which the two top players hold a 66% share does not leave much scope for competitors to develop unless the latter consolidate to stand a fair chance.  Indeed, in recent years, we have seen TNT  – who does not, unlike FedEx, enjoy a very broad base outside of Europe –  getting squeezed little by little out of the market by DHL and UPS.

Consequently, from a regulatory perspective in Europe, which is the only region in which FedEx’s acquisition will have a far-reaching impact, one can almost consider this to be a done deal.  TNT will need to sell-off it’s TNT Airways in Belgium and Pan Air Lineas in Spain to comply with European legislation on majority shareholdings in the airline industry, but those are probably the only sacrifices the FedEx-TNT duo will need to concede to the authorities.  This is wonderfully simple compared to some intricate mergers that require the divestment of multiple business units.

All plain sailing from now on?

Now that the price of the transaction is agreed and the regulators’ blessing will likely be little more than a formality, the next hurdle will by far be the biggest: the ability to integrate TNT into FedEx with minimal distraction to the two companies’ day-to-day business.

Combining I.T. systems and blending two supply chains are possibly the two most challenging and risky aspects of any post-merger integration, because both are very complex and have a direct impact on business continuity, in the worst cases with catastrophic results.  Logistics and I.T. are the core of companies such as FedEx and TNT, and the benefit of pulling these two companies together has little to do with commercial clout: it really is about network density and critical mass of the flows within that network.  And for that to happen, the two companies will need to be seamlessly integrated and truly operate as one to be on an equal footing with UPS and capture their share of the growing European parcel market.  This will require detailed planning and perfect execution to avoid any deterioration of service levels.

Threat or opportunity for UPS?

large_FedEx_buys_TNT_storyThe union of FedEx and TNT is clearly positioned to break into Europe’s top league and preventing DHL and UPS from achieving total hegemony in that region.  Perversely, for UPS that threat could also be a pivotal opportunity; UPS have not had an easy time in Europe in recent years but the strategy they appear to be following is consistent and may bear some fruit.  Recently, a UPS spokesman stated that his company is constantly evaluating the marketplace for potential acquisitions and that it would be investing more than $1 billion to expand its European business organically. Recent acquisitions, such as Kiala in 2012, which increased UPS’s reach at package pickup points at kiosks and other small stores, are proof that UPS’s expansion strategy is being implemented.

FedEx and TNT are now trying to hinder UPS’s expansion plans, but if the complexity of the FedEx – TNT integration absorbs those companies’ energy and focus, this could be a fantastic opportunity for UPS to turn the threat into a unique opportunity.  Bluntly said, they might be able to “kick ass” and leap ahead whilst FedEx and TNT focus inwardly on designing and implementing their way forward.

Now that the plans are on the table, the outcome will depend on one last phase : the quality of implementation of the FedEx / TNT integration.  Let’s give the jury 2 years from the moment this deal closes to deliver their verdict.


Broad smiles or an anxious rictus?

(Photo by Chesnot/Getty Images)

On 15th April, Nokia announced its intention to acquire Alcatel-Lucent in an all-share deal.  Nokia’s Risto Siilasmaa and CEO Rajeev Suri were seen exchanging a warm hand shake with Alcatel-Lucent’s Philippe Camus and CEO Michel Combes, all four gentlemen displaying beaming smiles as the news of their forthcoming merger hit the news wires and sent shock-waves across what is already an extremely consolidated industry.

That news was not completely unexpected: Nokia, and more particularly Alcatel-Lucent, have gone through some very painful and convoluted restructuring exercises these past few years, and are only now feeling the first early signs of some recovery.  Still, each has areas of weakness which the combination of both groups could potentially resolve.  Furthermore, wireless communication is an area that requires astronomical R&D budgets. As consumers begin to embrace 4G communication, the world’s leading providers are already putting the finishing touches to the future 5G, announced for the early 2020’s, and teaming up to finance those developments and rolling them out across the globe makes eminent sense. The business case for this merger is plain to see on paper, but whether the expected benefits will materialise during the implementation remains to be seen: several formidable challenges lie ahead.  None of them impossible, but each one of them pretty tough!

Nokia’s “open Sesame” to the USA may open doors for other players

Whereas Alcatel-Lucent has for years enjoyed strong market presence and excellent relationships with major telecommunications operators, Nokia has struggled to get anywhere in that area, allowing another Nordic company, Ericsson, to share that large and lucrative market with Alcatel-Lucent.  It is fair to say that Alcatel-Lucent’s saving grace in the USA is the fact that the world’s largest provider of wireless systems happens to be China’s Huawei, which is de facto barred from penetrating the United States’ market amid fears of industrial and political spying from a company that has close ties with the Chinese government.

By tying up with Alcatel-Lucent, Nokia will clearly be able to shoehorn itself into the lucrative American market, but whereas there were three non-Chinese suppliers of telecom equipment on that market, Nokia, Alcatel-Lucent and Ericsson, the merger will bring this down to two.  Who will the third provider be that is required for any fair tendering process?  As Huawei is likely to continue being denied access, the Nokia-ALU merger might create unforeseen potential for Samsung, thus far confined to the Asian market, to leap onto the American stage.

Once bitten, twice shy?  Not for Alcatel-Lucent!

Alcatel-Lucent, like most of the major telecommunication equipment providers, is today the result of a number of acquisitions and business integrations.  Alcatel and Lucent’s merger in 2006 triggered the merger of Nokia Networks with Germany’s Siemens.  As an after-shock five years later, Ericsson acquired Nortel’s wireless networking business, prompting Nokia to buy out Motorola’s infrastructure division…

Any M&A integration brings its own share of difficulties and struggles, but Alcatel-Lucent have suffered more than most; by comparison to the vision which was depicted back in 2006, the Alcatel-Lucent merger will be remembered in history as a failure.  Being viewed as a strategic asset by French Governments will have been both a blessing (too big and strategically important to be allowed to fail) and a curse (government intervention which would rather apply a dressing onto the wounds to hide them rather than approve a remedy that would cure the causes).  Almost ten years later, the cultural split between the former French iconic company and its American “spouse” is still prevalent.  Bringing in some “new blood” and an external perspective under the Nokia umbrella may provide a fantastic opportunity to lay a new base for the company’s culture and ways of working, away from the polarised Franco-American divide;  this would enable the combined group’s global ambition and cement the alliance to become a true powerhouse with unrivalled R&D capability.

Alternatively, the French government may continue to block any attempts to shape the Nokia-Alcatel-Lucent alliance as a world leader, by resisting any changes that might have the slightest detrimental impact on French jobs, pursuing the more self-centred goals of their re-election agenda. The weight of bureaucracy combined with restrictive labour-law practices might slow down the transformation of the business, and the new group could altogether miss the opportunity it is striving to capture in such a rapidly evolving market.

Finding ways to win in a particularly challenging sector

For over a decade, the internet and mobile communication sectors have been subjected to a pressure that is uncommon in other services: end users, be they consumers or corporations, expect the performance of their telecommunications and internet services to double in performance every 2-3 years, but without accepting to pay a single cent for that improvement.  Indeed, billions of consumers seem to consider access to the internet to be a natural right, in the same way as we can enjoy sunlight and air to breathe.

“Free” internet is a reality for numerous users, and we see huge resistance against attempts to introduce differentiated tariffs for heavy users compared to average users in the light of data streaming sites that require a very broad and steady flow of data to the end-users.

The frantic race to provide ever faster data transmission speeds without any price increases to users has evidently put tremendous pressure on the providers of the equipment required to provide those exponential service improvements.  This, coupled with the fact that revenues from data transmission did not follow the projections the telecom providers had forecasted a decade ago, means that the key source for potential margin improvement is to reduce the cost of the underlying infrastructure.

This is guaranteed to make life difficult for many years to come for the few telecom infrastructure providers left in this world, but combining that sharp commercial and cost cutting focus with the demands of a global M&A integration and transformation of business culture will indeed be a mammoth task.  Not impossible, but quite daunting nonetheless.

We must just hope that the authorities in Finland, and more particularly in France, do not prove to be the final straw on the camel’s back.  If Nokia-Alcatel-Lucent fail, we won’t be left with much of a choice on this planet.




Baked beans on toast for two of the world’s richest men

Kraft-Heinz-Main-BrandsBrazil’s richest man Jorge Paulo Lemann has teamed up with Warren Buffett to engineer a deal to merge with Heinz which will not generate much enthusiasm amongst the gourmet elite of this world.  But the Kraft Heinz merger has everything it takes to get financial markets excited, with the promise of USD 1.5bn annual savings by 2017 and combined sales of USD 29bn, making the future group North America’s third largest food and drink company and the world’s fifth.

Two unknowns remain.  Will the Kraft Heinz Company manage to generate growth beyond the annuity it will derive from savings in overhead costs?  And can it develop new product lines to evolve away from the very 1970’s image that characterizes much of the present range?

Why Oscar Mayer dogs, Mayo®, HP Sauce®, Jell-O®, Philadelphia® and Kool-Aid® can still generate billions

Changing living patterns and the increasing involvement of women in full-time employment created fast growing demand for time-saving foods through the 1950s until the early 1980’s; this was an era of instant coffee and Wonder Mash® which also witnessed the global expansion of fast-food restaurant chains.  But the world has moved on since the days of Macaroni and cheese.  Improvements in Supply Chain efficiency combined with advances in food science now allow supermarkets to offer a broad choice of ready meals of increasing sophistication.  Today, “convenience” also includes anything from fresh ready-to-eat mango salad to ready-to-cook peeled vegetables, as well as meal modules which consumers can combine to produce healthy balanced meals, with a starter, a main course and a dessert if they so desire, that provide the taste, nutrition value and visual appeal of the “real thing” without all the fuss of starting with basic ingredients.

So with every consumer survey telling us that people are now opting for organic or at least more natural foods from sustainable sources, and with the abundance and variety of quality foods on today’s supermarket shelves, how is it that companies such as Kraft and Heinz still manage to achieve sales that combine to USD 29 billion?

Kraft’s broad portfolio of brands will add to the Heinz range.
Now spot the missing item : the healthy option

Part of the explanation is to be found in the significant price gap between today’s high quality fresh products and run-of-the-mill heavily processed foods.  The average household’s budget priorities have changed over the past decade, with electronic gadgets, leisure and entertainment claiming an increasing share of the consumer’s wallet.  It is tempting for large families or for those on lower income to make savings on food when cheap alternatives can provide the same feeling of satiety at a fraction of the cost of the fancier items beautifully displayed on the supermarket shelves.

Secondly, one also needs to bear in mind that decades of mass-produced processed foods have created a degree of addiction to sugar, fat and salt, so that the consumers who opt for a large plate of French fries smeared with a generous layer of Heinz Ketchup may do so by choice rather than as a result of financial constraints.

There is, however, pressure from all sides to move consumers away from the heavily processed and generally unhealthy types of foods that come off the production-lines of companies such as Heinz and Kraft.  Eating habits do not change overnight, but the change will happen gradually.  Increasingly, the cost saving will become the only justification for buying “junk” food, and when that is the case, consumers guided by the need to make savings might opt for a supermarket’s own brand or a completely generic product rather than “premium branded” processed food.  This is not good news for the future Kraft Heinz Company in the longer term.

Management style will change things faster than eating habits

When Brazilian 3G and Warren Buffet’s Berkshire Hathaway acquired Heinz in 2013 and took the company private, it must clearly have been part of their plan to make another acquisition in that sector to create a paradigm shift within Heinz and change the balance of forces on the market.  Merging with Kraft turns that potential into a reality.  The shake-up is about to begin.

Jorge Lemann
3G’s Jorge Lemann
Warren Buffet
Warren Buffet

3G have acquired a reputation for very aggressive cost cutting, not just the excess or even the frills, but deep cuts everywhere possible whilst also challenging the priorities and seeking solid justification for any capital project or major item of expenditure.  Advertising costs are therefore most likely to be put under close scrutiny.  In my first job in the 1970’s as advertising research executive in one of London’s major advertising firms, my line manager told me “advertising is a unique product: we don’t know how it works, the client cannot tell for sure whether it works or not, and if it doesn’t the client doesn’t get his money back”.  3G surely won’t see it that way and today’s advertising gurus will need to come up with convincing reasons to justify every dollar of advertising spend if they want to retain the Kraft Heinz Company’s account.

Once the fat and duplication has been trimmed off the combined business and further savings are achieved through wiser allocation of sales and marketing funds, let us hope that the Kraft Heinz Company will re-invest some of their USD 1.5 billion annual saving into developing new lines of food to regenerate their portfolio, fuel longer term growth, and preserve the notoriety of those household brand names.

No celebrations for the banks this time

As not all mergers end up being successful, conventional wisdom would say that mergers and acquisitions present shareholders with the potential for value creation, whereas they offer banks and advisers immediate value through fees and financing arrangements.  The deal struck by Warren Buffett and Jorge Paulo Lemann is about to cause a serious dent in that conventional wisdom.

A merger of the magnitude of Heinz and Kraft’s would normally be toasted with champagne by the investment banks whose names invariably pop-up each time a deal is struck.  But in this particular case, the only toast will be the one covered in humble Heinz baked beans, because the two giants behind the deal are sitting on huge cash reserves and will not need big financing.  This means that Wall Street’s major banks will all miss out on their share of what is currently being tagged as the biggest M&A deal of 2015.

Oh well, we’ve only just reached the end of Quarter 1, there is still some time for other big guys to spark off a few more “biggest M&A deals of 2015” during the coming nine months.

Yahoo logo

What next big decision for Marissa Mayer?

Now that Yahoo! Have cashed in on the sale of 140 million shares of Chinese on-line retail giant Alibaba (subject to a one-year lockup), there are fears – or hopes –  that once she has fulfilled her promise of returning part of the cash of that sale to Yahoo!’s shareholders, CEO Marissa Mayer may make use of the rest of the cash to finance a merger with AOL, in line with a string of other acquisitions she made in recent years. Among those hoping for such an outcome is the well known investor activist Starboard Value LP who insist that combining the two organisations would not create synergies in the order of 1 billion US dollars in addition to being a tax efficient means of monetizing Yahoo!’s stake in Asian companies.

Yahoo logoThat is always a nice annuity to pocket in the future, but what is really at stake is future growth, rather than a one-time efficiency improvement, and when it comes to growth, both Yahoo! and AOL have been lagging behind the market leaders, thereby allowing the gap to grow ever wider.

So how are future prospects expected to rebound as the sole result of merging to relatively slow growth mammoth businesses?

“Merger”, really? Once bitten twice shy

It is hardly surprising that  AOL refused to comment on Starboard LP’s recommendations, having suffered during what Time Warner’s Jeff Bewkes himself qualified as the “biggest mistake in corporate history” in their 2001 merger that created AOL Time Warner, supposedly a merger of equals that would bring together a huge base of subscribers with “network access”, “search” and “content”.  AOL was also supposed to be a catalyst that would accelerate Time Warner’s slow rate or growth.  The struggle to deliver that dream began almost immediately, a dream that was short-lived as Time Warner spun off AOL in 2009.

AOL Investor relations logo
AOL’s shareholders are unlikely to warm up to the idea of a take-over by Yahoo!

After such a dire experience, I suspect AOL’s shareholders will think twice before attempting a repeat which based on a thinking not too dissimilar to the rationale underlying their ill-fated association with Time Warner in 2001, even more so as the word “merger” is quite semantic for what is in reality bound to be a mere “take over”.

Whilst most of the media coverage about this potential deal refers to a “merger”, Yahoo!’s market value runs at $40.5 billion compared to AOL’s mere $3.5 billion, so this would most likely be the former merely snapping up the latter, particularly as Yahoo! is sitting on $9 billion of cash. Consequently, AOL would dissolve within the greater Yahoo! galaxy.

Yahoo! might as a result feel like renaming itself “Yahoo+” to reflect that it is striving to become a better and faster growing company offering a more comprehensive range of services to on-line users, mainly though AOL’s recent acquisition of offering on-line video programming.  But will this “+” really be a plus for internet users and therefore for Yahoo! or more simply a huge distraction for management when the real prize of the game is to return to accelerated growth?

The value proposition and ingredients of growth

Yahoo messenger logo

Some might believe that Yahoo!’s growth performance was actually quite good in recent years, however many analysts will contend that Yahoo! owes much that apparent good track record to the phenomenal contribution of its investment in Alibaba.  Now that this valuable contributor to Yahoo!’s bottom line will no longer play that part in the future, something else is needed to fuel growth: either the acquisition of another high growth business, and/or learning to become a growing business again by itself again.

Value and fast growth in the internet world come from getting first-mover advantage when introducing innovative services or totally new ways of approaching something that already existed under another form. The real problem, for Yahoo! and AOL, is that the market leaders that are raking up the world’s digital advertising money are Google and Facebook, who repeatedly invent things most consumers did not even know they wanted, thereby growing the gap between themselves and the rest of the market.

Internet research company eMarketer estimates the global value of digital advertising spend to be approximately $140 billion, a third of which is captured by Google, with the number 2 player being Facebook, considerably lower down the scale but with a nonetheless respectable 8% market share.  In the event of a merger, AOL and Yahoo!’s combined market share would bring them to a mere 3.5% share based on their 2013 positions from which they have both declined. That would make them the N°3, but still miles behind the two leaders…

AOL LogoIn many global industries, the game is played between N°1 and N°2 on the market, and life can be considerably more challenging for N°3 and next followers, particularly where the gaps in market shares are significant, as they are in the case of digital advertising which is really a case of Google, Facebook and “all others”.

Those who believe that “size matters” will not be led to believe that pulling Yahoo! and AOL together will suffice to catapult Yahoo! back to the glory of its early years.  There needs to be more, something that would make Yahoo! nimble and capable of jumping into new opportunities before either Google or Facebook can occupy those spaces as they emerge.

So if it’s not growth, then what?

Following the sale of the Alibaba shares, Starboard Value LP’s Jeffrey Smith argues that Yahoo!’s tax structure is inefficient to the extent that $16 billion of additional value could be derived from more tax efficient deal structures whist monetizing its stakes in Asia. I find that number quite incredibly high but agree that most companies in this world have scope for tax efficiency improvements in their legal structures and the way they construct their M&A deals, so I’ll leave Jeffrey Smith with the argument he puts forward.

The counter-argument, in my opinion, is that in the same way as the potential $1 billion saving in overheads, tax savings are an annuity which changes the height but not the slope of a company’s value curve over time.  So yes, there may well be a lot of money to be gained over the next 3 years by implementing Jeffrey Smith’s recommendations, or one may ask oneself where Yahoo! (or “Yahoo+” for that matter) will be positioned in 5, 10 or 15 years from now.

There is probably no right or wrong answer.  Most of us would have been hard pressed in 1999 to imagine the breadth of uses and applications the digital world offers us today, let even how things will look by 2025 or 2030.  So some will follow Jeffrey Smith’s view which equates a “go for it now and adjust later as circumstances require”, others will take a more strategy view and start thinking about what it will take – internally and/or through some acquisitions – to give back to Yahoo! the energy, saliency, innovative image and apparent invincibility of its early years.

One thing is certain: Marissa Mayer must be under tremendous pressure now to do “the right thing”, whatever the future will judge that right thing should have been.

How can two world-renowned business leaders commit first-time-beginner mistakes ?

Told you so …

Some critics, journalists and experts from all walks of life relish in pointing out how accurately they had predicted a business failure many months before it occurred.  One year exactly after Publicis and Omnicom announced their plan to merge, I don’t take much pride in having spelt out at the time what would happen to their phantasm of becoming the world’s largest marketing services company:  John Wren and Maurice Levy’s proposed scheme contained all the misconceptions and glaring mistakes one can possibly make in a merger or acquisition.  A real beginners’ job.  It is actually quite shocking to see two internationally respected businessmen totally ignoring some of the basic rules they could have found in the introduction of “Mergers and Acquisitions for Dummies”, which is easily available from Amazon alongside my own “Perfect M&As – The Art of Business Integration”.

Visualising the end game

Before and After : Publicis's Maurice Levy, all smiles as the merger project was announced.
Before and After : Publicis’s Maurice Levy, all smiles as the merger project was announced.

The Publicis-Omnicom proposed deal did not rest on a compelling business case, and in the absence of a clear and credible statement of the benefits the merger will

provide, one cannot expect to have the drive and motivation to overcome the many hurdles and challenges that need to be resolved as two organisations blend to become one.  Who is the individual that will set the tone? What will the resulting merged company look and feel like considering the two companies each have a strong but very different culture?   How well will Wren and Levy agree on key decisions?  The answer to this last point became blatantly obvious: not being able to agree on the nomination of the CFO is just so basic one struggles to understand how Messrs Wren and Levy allowed themselves to reveal with such enthusiasm and optimism a plan for which the first elementary steps had not even been thought through.

By Omnicom’s chief executive’s own admission : “There was no clear finish line in sight”.  How is it conceivable that such senior and supposedly experienced business leaders could ignore the most basic prerequisites of a successful business integration?

Preparation, preparation, preparation

Maurice Levy has to recognize the glaring shortfalls of the Publicis - Omnicom merger plan
Maurice Levy has to recognize the glaring shortfalls of the Publicis – Omnicom merger plan

It will take a good autopsy of this failed merger to reveal how much (or how little) advice the two companies had requested and received and considered prior to announcing their merger plan to the world.  Was there really that little due diligence prior to the announcement, or did the two businessmen simply ignore any warning signs they might have been given? Were they blinded by the prospect and thrill of becoming the world’s number one agency, bigger, better and bolder than Sir Martin Sorrell’s WPP? When Publicis and Omnicom announced their intention to merge, my article referred to “The obsession with size”.  Was this finally just about two over-inflated egos, or was there truly a cogent business rationale which failed to materialise?

How is it that nobody had anticipated that tax considerations would invalidate the complex structure on which the proposed combined company was due to be set-up?  Last year, in writing “shareholders vote by raising their hand, but clients can vote with their feet”,  I was wondering how forcing fierce global rivals such as Coca-Cola/Pepsi, Nestlé/Mars or Microsoft/Google to deal with one combined agency would not run into regulatory problems or result in some of those key clients seeking other options.  Now it transpires that amidst the difficulties to keep the merger on track, talent and client retention also became a big challenge: is that at all surprising?

Maintaining focus

Any book or “how to” manual on M&A will tell you that one of the big challenges during the merger process is to manage the dual focus of keeping day-to-day business on track whilst maintaining the integration drive.  Publicis already had a few problems of its own to resolve prior to the merger announcement, and attempting a complex merger in that state is like covering rust with glossy paint that will not take long to peel off.  In the absence of clear succession plans in Publicis Maurice Levy had already postponed his retirement before the merger proposal was on his radar screen, so by what miracle would the key pieces of the puzzle all fall beautifully into place in a combined Publicis-Omnicom organisation if Publicis could not figure out how to organise itself as a stand-alone entity?

Predictably, the uncertainty and lack of unity of vision that rapidly emerged after the merger announcement proved a huge distraction to the business.  Now the engagement is over, and the bruised fiancée is licking her wounds.  Publicis’s shares have dropped 16% since the beginning of the year, wiping off EUR 1.8 billion of the company’s value, with a drop in net income and further margin erosion,  whilst Omnicom announces a healthy rise in revenue.

After such a poor performance, Maurice Levy had better return to his desk and thrash out a coherent succession plan to restore clarity within Publicis, as many shareholders will feel he has reached the end of his shelf-life.


Two European giants with global reach

Holcim and Lafarge, confident of making the (b)right choice in cementing their future together
Holcim and Lafarge, confident of making the (b)right choice in cementing their future

For a change, this month’s mega-merger announcement does not involve American or Asian heavyweight players, but rather two giants in “old Europe”.  It is not about social media, high-tech or software, and will instead rock an industry which has none of that glitz and glamour  : cement.

Having flirted together but failed to reach a deal 18 months ago, the world’s two biggest cement producers (by value) are set to blend, in what is described as a merger of equals (after all, cement is cement …) as Holcim intends to acquire Lafarge and become a global giant with an annual turnover of 32 billion Euros.

A feast for the anti-trust regulators

Once combined, Holcim and Lafarge would have operations in 90 countries.  This would not be the first time an industry’s two largest players are allowed to merge after letting go of some assets, as did Guinness and GrandMet in 1997 to form Diageo, but the approval of that merger required some seven months of deliberations by regulators across the world.

Holcim and Lafarge expect to be under scrutiny in at least 15 countries.  This is unlikely to be a casual routinely exercise, because the cement industry has a long history of collusion and price fixing, acting as a cartel in many countries, and both Holcim and Lafarge are among the cement producers being probed under an investigation launched by the European Commission in 2010 which is still open.  In that context, important concessions will need to be made to the regulators if the deal wants to have the remotest chance of closing by the beginning of 2015 as Holcim and Lafarge predicted in their announcement.

Those sacrifices are already part of the merger scenario; a Lafarge spokesperson confirmed that up to 15% of the new group’s assets might be divested to secure the anti-trust authorities approval of the deal.   Two-thirds of those disposals are likely to occur in Western Europe where the overlap between the two merging companies is the most significant.  Compared to shutting down plants, selling production plants to competitors avoids massive lay-offs and also reinforces competition on the market: this is evidently something that will be perceived as positive by European authorities.

However, Western Europe is the area where cement over-capacity is at its worst and the market’s growth prospects are dull.  In that context, the pair’s disposals might only fetch a very low price, and if that divestment programme does not generate the projected 5 billion Euros, the business case of the merger could be quite seriously affected.

An ambitious business case

Some of the rationale for the Holcim-Lafarge merger makes eminent sense, but other components of the business case will require a real tour de force to be achieved.  The merger announcement failed to cause much excitement on the markets, even though the share price rise both Holcim and Larfarge have experienced – oscillating mostly between 5 and 12% – reveals a degree of interest from investors.

Holcim-1Cement is bulky, heavy and of low value relative to its weight. The market catchment area for any given production plant is therefore quite limited as transport costs rapidly outweigh economies of scale.  The positive side of this is that cement is one sector in which mature economies are not likely to be invaded by Chinese production, even if China now accounts for more than half of the world’s cement consumption.  A producer’s geographical spread is therefore a key factor.  In that sense, Holcim and Lafarge complement each other particularly well in the fast growing economies, as the former is strong in Latin America and Asia whilst the latter is well positioned in Africa and the Middle East.  The pair believe that the lower risk and business fluctuations resulting from better geographical spread will reduce their borrowing costs, thereby generating annual savings of some 200 million Euros.

Holcim and Lafarge believe they can save an annual 1.4 billion Euros three years after merging, which together with to the above-mentioned saving in financing costs would include 340 million on procurement and 250 million on sales costs, to mention just the key savings areas.  If they can manage that it will be quite a remarkable achievement considering their heavy involvement in France and Germany, two notoriously inflexible labour markets in which change can be slow and costly to implement.

Does the “value magic” reside in transforming the industry?

Beyond the promise of operational and financing savings, two components of the rationale for the Holcim-Lafarge merger are quite hypothetical at this stage but are potentially the most significant generators of economic value in the longer term.

Firstly, it takes a real mammoth to fight the growing competition in some of the world’s rapidly growing markets, such as China where Anhui Conch became the world’s largest cement maker last year (by volume, not by value), or Mexico’s Cemex, currently the world’s Nr 6 but growing on the fast lane to overtake its rivals.

Secondly, and this is the more exciting aspect of the merger, the pair’s combined marketing nous and R&D capability has the potential to revolutionise the market with the launch of innovative products which would transform the image of the industry, until now only too similar to the physical attributes of the product : rigid, grey and dusty …  Maybe cement can really be more than cement: Lafarge in particular has developed products whose improved specifications justify higher pricing and elevate cement above its current commodity status, such as fast drying cement or even cement which can set under water.  Variations in tone, texture and appearance are also on the cards, and with this comes the potential  – and the expectation as far as Holcim and Lafarge are concerned –  to play an active role in the evolution of architectural design and advise architects in their choices of these innovative materials.

Lafarges-Roberta-Plant-Calera-UsaConceptually and intellectually, this is quite an appealing and exciting challenge, but it is difficult to imagine such transformation within the next three to five years in two companies which until now have relied mostly on size and hegemony (and some times price-fixing when the going became too tough) rather than being agile and capable of re-inventing themselves by adding a service veneer over their heavy industry core.

Another fascinating business case commences for future business school students.  Let’s watch the next moves and allow three to five years before the jury delivers its verdict. We may be in for a good surprise.

Scepticism at Lenovo’s Appetite

One month ago, on the subject of the Motorola acquisition of Motorola Mobility, I wrote “The payback on Lenovo’s investment to shoehorn itself into the Americas’ large and lucrative mobile market assumes that the magic that occurred with the ThinkPad® can be repeated with the Motorola brand.  Let’s watch this pace during the next two or three years…”

The markets evidently don't think much of Mr Yang's double mega-acquisition; let's hope he can outsmart them after all.
The markets evidently don’t think much of Mr Yang’s double mega-acquisition; let’s hope he can outsmart them after all.

It seems we do not need to wait two or three years to feel the scepticism of the markets: Lenovo shares have lost 25% of their value since 23rd January.  Now that the celebrations of the Chinese new year are behind us, could Lenovo be waking up with a nasty hangover?

Lenovo’s CEO Yang Yuanqing does not seem to be too bothered  about Motorola’s 1 billion losses in the past year, asserting that Lenovo’s know-how in manufacturing would rapidly overcome Motorola’s inefficiencies.  Mr Yang is giving himself 18 months to stem the haemorrhage at Motorola and return the company to profitability.

From Lenovo’s perspective, it is understandable that the group wants to expand and move away rapidly from its reliance on the fast shrinking PC and laptop market and is aiming to become a key player in the broader technology market and mobile devices in particular to take Apple and Samsung head-on.  Strategically this all makes eminent sense, but how much pain and effort will be needed to realise this vision?

Slimming cure or anorexia ?

An analyst at Barclays in Hong Kong estimated that Lenovo could reduce its operating expenses by 70%.  If it really takes that much of a cut to make Lenovo’s acquisition of Mototola Mobility worthwhile, then I join the ranks of the sceptics who are behind the drop in Lenovo’s shares.  I have worked on cost reduction programmes requiring 15, 20 or even 25% cuts in operating costs.  Beyond those numbers the expected outcome is a totally different business.  After a 70% cut one may wonder what, if anything, is left of the original business.  Motorola has not commented on the feasibility of these drastic cuts and is probably wise not to commit to such action, giving Mr Yang some latitude in choosing the way forward.

In fairness, Yang Yuanqing aims to grow Motorola’s sales quite dramatically by targeting emerging markets, thereby generating economies of scale as well as setting up operations in China on a very different cost base than that used by Motorola in Texas.  Still, the magnitude of the change remains huge, and what will matter in the end is whether Motorola can digest the integration of Motorola at the same time as it absorbs IBM’s low-end server business.

Coming soon, in a business school near you…

Either way, the journey on which Lenovo is about to embark is guaranteed to become an iconic case study for a generation to come in business schools across the globe, either filed next to the ominous Daimler Chrysler merger and demerger disaster, or hailed as a truly amazing feat of strategic vision and supreme excellence in execution.

I wish the latter to Mr Yang, because failure would just result in a “told you so”, whereas succeeding in the huge challenge that lies ahead for Lenovo would provide positive learning which is in short supply in the business world today.

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.