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M&A Integration

Second time lucky?


But the world has changed in the meantime, and in 2013 the same US antitrust regulator allowed Office Depot to acquire Officemax without divesting a single of the acquired business’s outlets.  It did not take much time for Starboard Value, one of Staples very vocal shareholders, to notice the change of mood on the market and urge Staples to approach Office Depot again.

All seemed to be progressing as planned since the acquisition was announced on 2nd April of this year; the proposed deal was give a green light by the regulators in New Zealand on 5th June, followed by China one week later, and more recently Australia on 13th August.  However, the US and European Union regulators have now decided to put that deal through close scrutiny.  Almost six months after the initial announcement, Staples and Office Depot’s dream is suddenly at risk. So what is so different in North America and Europe compared to the eastern hemisphere?

Same situation seen from two perspectives

The regulators in the United States and Canada are understandably concerned that from three major office supply chains in 2013, the market effectively would only have one such chain form 2016 onwards.  Whilst Staples and Office Depot have each broadened their product ranges well beyond traditional stationery items, equipment and office furniture, to include also a range of associated services, the coming together of Staples and Office Depot gives a new meaning to “one stop shop” if there is no other shop to go to!

Staples share price
Staples share price

“We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses and optimize our retail footprint. These savings will dramatically accelerate our strategic reinvention which is focused on driving growth in our delivery businesses and in categories beyond office supplies.” says Staples’ Chairman and CEO Ron Sargeant.  That broadening into new categories will result in Staples and Office Depot being confronted with new competitors as they enter these new categories, some of them with regional strongholds or a specific focus that can allow them to co-exist profitably side-by-side with the newly created monolith.  Compared to the situation that prevailed in 1997 when Staples and Office Depot’s first attempt to merge was aborted, the key difference is the emergence and explosive growth of on-line retail, which has allowed many new entrants to carve out their slice of the market.

Office Depot share price
Office Depot share price

Language and geographical barriers in Europe have not allowed on-line retail to grow at the same pace as in North America, which is why the European Union regulator is of the opinion, until further proof that might emerge from the current investigation, that the proposed Staples and Office Depot merger will have a more detrimental impact on competition in mainland Europe that it might have in North America.

So the jury is out.  The European Union will announce its decision by 10th February 2016.  This is somewhat of a blow to Staples and Office Depot who had planned on completing their deal before the end of the current year (and are still pushing hard to do so).  Evidently, after the jubilation of February, the uncertainty around the final outcome of this very bold bid is having its toll on the share price of both companies.

One may still hope that the European regulator will deliver a verdict before the full 90 days to which they are entitled to carry out their detailed investigation, but civil servants do not receive a bonus for productivity, so things may well drag on until 10th February 2016.  I have indeed worked on some acquisitions that were given the green light at the close of business on the very last day of the regulator’s deadline, putting everyone through a nail-biting suspense…

The benefit of Office Depot’s expertise

The deal, which is all too often referred to as a merger between Staples and Office Depot, is clearly an acquisition, and although both parties have alluded to integrating in the spirit of a merger, Staples have already unequivocally stated that the headquarters of the combined company will remain in Framingham MA.  So there could well be some office space for rent in Boca Raton FL, if the deal goes ahead.  Nonetheless, Office Depot’s Chairman and CEO Roland Smith sees the proposed deal as “an endorsement … of the success [Office Depot] has had integrating OfficeMax over the past year”.

That experience may definitely come well in hand if Staples and Office Depot are allowed to proceed with their dream, because in spite of the high percentage of post M&A integrations that fail, companies that have repeated or at least recent experience of post-M&A integration become better at it as they repeat that experience, avoiding the multiple traps and pitfalls into which the majority of the first-timers tend to fall.

Integrating Staples and Office Depot will be a programme of far greater magnitude than Office Depot’s recent integration of OfficeMax, however that experience will provide a reality check in terms of resource requirements, time-lines, benefits realisation and integration methodology.  For that to happen, the two companies will indeed need to integrate “in the spirit of a merger”, because the acquirer will need to learn from the acquired company.

So unless the regulators ruin the whole show, this one has the potential to be a very successful integration indeed.  Let’s wish Staples and Office Depot good luck!

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.




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.

$24.4bn to change the future of his “baby”

Having received his shareholders’ clearance for the leverage buyout he has been leading since January, at a handsome cost of $24.4bn and after a bitter fight against fierce opponents, not least with activist Carl Icahn, which resulted in the bid being raised six times before being submitted to the shareholders, we must hope that Michael Dell’s vision of the future for the company he floated in 1988 and has now bought back is spot on.

Can we expect a parallel here with what happened to Apple when Steve Jobs was given the reins again after years of being cast aside, and propelled his company to extraordinary heights by offering consumers products they had not even dreamt of?  Michael Dell created a new business model back in the 1980’s by cutting out a cumbersome layer of computer retailers, selling directly to end-users and thereby eliminating stocks of finished products that become obsolete in a matter of months.  This was a smart business strategy indeed, but that hardly sets Michael Dell as a creative genius on par with someone like Steve Jobs.  So after a few difficult years, why should Dell’s future look rosier under the stewardship and ownership of Mr Michael Dell himself?

Taking the longer term view

Michael Dell’s view is that public companies are hampered by the stock market which forces them to focus on a ninety-day horizon to the next quarterly results rather than take a long term perspective, and prevents them from embarking on bold strategies which, being riskier, could temporarily lower their share value.

By returning the company to private ownership, Mr Dell intends to be very bold indeed by implementing a strategy that contains a number of elements which would make many a public shareholder shriek : at a time when most manufacturers are cautiously turning away from the shrinking personal computer business, Michael Dell intends to plough new energy and focus into that sector and reclaim the dominant market share his company enjoyed in the past.  He also intends to significantly increase R&D investment which, in turn, means far less profit in the next few years for the sake of a brilliant long term future – if his endeavour succeeds.

A better M&A strategy, or so Mr Dell believes

Dell’s very active M&A strategy has resulted in rapid top-line growth over the past five years, but it has also been a source of a constant wrangling with many shareholders who believed the company was losing focus.  Probably tired of trying to explain the cogency of his M&A strategy to a bunch of ignorant shareholders who do not understand his vision, Michael Dell could only adopt the radical solution of ending the democratic process of shareholder voting and taking control again, with a closely knit team of co-investors who believe in him and share his vision.

My experience, in sectors that do not evolve at the dizzy speed of computer technology, is that mergers and acquisitions that do not rest on a blatantly obvious business case will face hard times when the businesses need to be integrated, because any post-merger integration requires some pain and effort, which people will only accept if the reason for doing so makes it all worthwhile.  In the absence of a strong “reason why”, driving change towards a successful outcome becomes arduous, if not impossible.

The number of Dell employees passed the 100,000 mark in 2011: that’s a lot of people who need convincing that Michael Dell is right.  Or maybe this just calls for an act of faith, because technology progresses at a pace which requires some visionary individuals to conceive products and services we other mortals cannot begin to imagine.  To win that race, Mr Dell wants to accelerate the transformation of his company, and maybe he is right in thinking that there is no time under such circumstances to convince analysts and shareholders of the soundness of his strategy – just grab control of the company and run!

This will be an interesting space to watch during the coming five years.  By then, Michael Dell will either be able to grin and say to the world “told you so!”, or his company will have hit a brick wall.  It would be good to see boldness rewarded, so let’s hope Michael Dell is right and all of his detractors were wrong.

(written on a Dell computer)

Two ways of looking at the same thing

On 24th September, the world’s largest chip manufacturing equipment maker U.S. based Applied Materials (AMAT) announced its intention to merge with world number three Tokyo Electron, resulting in a company which will be twice the size of its next rival.


AMAT’s executive chairman Mike Splinter commented on CNBC that he believed “the regulators will look closely at this deal” but concluded that he is “confident it will get approved”.  Not so according to the same CNBC’s Jim Cramer who declared “This deal will not go through.  It will absolutely not go through”. There is only one absolute certainty: one of these two gentlemen is right!

Market dominance: the helicopter view vs. the microscope

In his categorical prediction, Jim Cramer also refers to some of the U.S. Regulators’ recent decision, particularly their opposition to mega mergers in the airline industry (see American Airlines – US Airways article on this blog site), which follows years of relative leniency during which industry consolidation was seen as a necessary evil to remain competitive in global markets.  The question, really,  is to define the point at which a company becomes so competitive that it effectively crushes its rivals and erects barriers to the entry of newcomers.  In other words: market dominance.

Opponents to the merger will be quick to point out that the resulting merged company would achieve a worldwide market share of over 25% of all chip manufacturing equipment, whereas the number 2 would struggle to maintain 13%, particularly as AMAT’s executive chairman states that beyond generating costs savings, the merger would enable the combined entity to gain a few points in market share.

AMAT and Tokyo Electron will therefore need to “educate” all the regulatory bodies consulted in this matter to demonstrate that although there is some overlap in their products, most of them actually complement each other in the end-to-end process of chip manufacturing, because that process involves a number of different tasks performed by different machines.  Seen from that angle (if they can persuade the regulators to adopt that view), the merger closes gaps and does not result in a simple addition of the two players’ current market shares.

The outcome of a debate between helicopter view and deep-dive into the segmentation of a market is quite uncertain.  Back in 1997 when Guinness and Grand Met merged to become Diageo, competitors and customers were argued that owning Gordon’s, Tanqueray, Booths and Bombay Sapphire would give Diageo complete dominance of the gin market.  Diageo, on the other hand, contended that those brands’ market shares should be considered within the broader context of white spirits (which include vodka, white rum, cachaça), so that even by including Smirnoff vodka into that calculation, Diageo would only be a relatively modest player in an enormous market.  In that instance, the Regulators did not quite buy into Diageo’s argumentation, forced the group to dispose of Bombay Sapphire, and whilst looking at the white spirits category as a whole, also forced Diageo to sell rum-based brand Malibu.

Supplier vs. customer power

It would be wrong, however, to compare the Regulators’ conditional acceptance of the Diageo merger and refusal of the American Airlines – US Airways merger to the proposal which is being put forward by AMAT and Tokyo Electron.  The regulators’ main focus is the impact on the end-consumer rather than what happens upstream in the value chain.  Allowing a consolidated supplier to dictate prices in an unchallenged manner to an atomized set of customers inflates prices and is therefore detrimental to the end-consumer.  But AMAT and Tokyo Electron’s main customers are a industry giants such as Intel Corporation, Samsung Electronics or Taiwan Semiconductor Manufacturing Company: the very companies that have continuously exerted extreme pressure on their suppliers to reduce their costs whilst at the same time requiring the development of ever increasingly sophisticated equipment to match the exponential complexity and miniaturisation of micro-processor chips.

Seen from that angle, the Regulators might view the AMAT – Tokyo Electron merger as restoring the balance between a supplier and its dominant customers rather than upsetting the balance within the pool of suppliers.  Even if that merger allows the future company to gain a few points in terms of gross margin, this will be achieved through savings and improved efficiencies rather than through increases in selling prices which will be contained by the group’s giant customers.  It is therefore unlikely to cause a perceptible impact on the end consumer price of a large screen TV, tablet, smartphone or laptop computer.

As a final consideration, the consolidation of R&D capability could ultimately benefit the end-consumer by allowing an acceleration of the pace at which the performance of microprocessors improves.

So all things considered, if AMAT and Tokyo Electron construct a cogent argumentation, it is quite possible they will get their way.  That certainly seems to be the view of both companies’ shareholders, judging by the stock market reaction to the merger announcement.

Konichiwa ?  Ugh, not that well actually!

The biggest hurdle ahead for AMAT and Tokyo Electron will probably not be the regulators’ verdict, but what will ensue.  Whilst Tokyo Electron may well be considered as one of Japan’s most “westernised” companies, it is not a Japanese subsidiary of a western company and this is important, because the combined business culture and ways of working will need to be redefined.

Already now, both sides are trying to emit the right sound-bytes in an attempt to pave a smooth way towards a harmonious integration; but anyone with some experience of post-merger integrations can see through that smoke-screen.  “A merger of equals” is the official version, though it will in fact be a 68% AMAT / 32% Tokyo Electron balance.  To restore some sense of equilibrium, AMAT’s recently appointed CEO will move to Tokyo and run the combined business from there.  It remains to be seen whether the Japanese language has an equivalent for the idiom of “the tail wagging the dog”.

More significant even than the challenge presented by the business culture integration is the fact that both AMAT and Tokyo Electron are operating in a highly cyclical and very tough market.  AMAT’s net income fell to $168 million in its most recent quarterly results, compared to $218 million the previous year.  In Japan, things do not look rosy either as the semiconductor industry is living through difficult times, with important players filing for bankruptcy or being bailed out by the Japanese government, leading to diminished demand for Tokyo Electron’s products in their key home market.

The relative uncertainty and more importantly the likely duration of the regulatory process may cause some instability in both companies at a time when they need to focus on surviving through these difficult times, and the integration that lies ahead will be a huge distraction.

And the end result is …

If the AMAT – Tokyo Electron merger goes ahead  – which I think is likely, contrary to Jim Cramer’s confident statement –  the price of our smartphones, tablets, large screen TVs and laptops will not jump, but that merger may have a domino effect in the industry, as the world’s number two ASML will seek alliances and acquisitions to avoid being dwarfed.

Consolidation is the almost inevitable evolution of a maturing industry.

It is widespread knowledge that 50% to 80% of all mergers and acquisitions fail to deliver the benefits described in their business case, and a sign of blissful ignorance that so many companies continue to embark on major acquisitions or mergers whilst ill-prepared, confident that they will reach a successful outcome when in fact the odds are seriously stacked against them.

On the other hand, numerous case studies show us that companies that have grown through a series of mergers and acquisitions demonstrate repeated success in integrating these new businesses.  This proves that there are lessons to be learnt, and that repeated experience is essential to be able to plan, prepare and execute a complex integration to deliver a positive and value-creating outcome.

Business as “unusual”

Integrating companies has very little in common with “business as usual” : it requires the ability to execute a complex business transformation programme whilst driving two businesses, rather than one, which are most probably both destabilised and whose employees’ effectiveness may dip as a consequence of the distraction and uncertainty caused by the merger, whilst also reaching the commercial targets set in the business plan, the synergies expected from the merger or acquisition, and creating the target organisation with fully integrated processes, ways of working and culture.

The challenge for the team at the top is therefore huge;  it actually becomes an impossible task unless additional resources are called in and responsibilities clearly segregated between maintaining the day-to-day business on track and driving the integration effort.

What really matters

Integrating business is an art : the combination of skill and talent.  The skill is in the way one can achieve one of the essential components of a successful integration : speed.  Speed requires preparation and excellent programme management.  The talent is that of good leadership to drive durable change.  This is why serial acquirers are remarkably good integrators : they know what can be prepared in advance, they are aware of the interdependencies that need to be managed throughout the integration programme, they have learnt to plan for the usual hurdles which appear in such business transformation initiatives and have developed a flair to pre-empt issues in their early stages.  They also know what traits of leadership are essential to drive change and how gaps in some individuals’ talent can be overcome.

There’s always a first time

Before becoming an excellent serial acquirer, every company has had a “first” and learnt from someone who had the experience and the ability to transfer that knowledge onwards, someone who has successfully driven numerous business integrations, often on a continental scale.  By working with the Executive team of the company, that experienced specialist allows the business to manage the dual focus of on-going commercial activity and integration.  This approach has the added advantage of leaving  a lasting legacy, because the organisation progresses along a learning curve during this first integration, gathering a capital of knowledge and new experience which will be of immense value for the integration of the next acquisition.

Chalk and Cheese High Above the Clouds

As a very frequent user of airline services, I have followed with interest the developments relating to the merger efforts of British Airways and Iberia under the umbrella of their common owner IAG (International Consolidated Airlines Group S.A.).  The alliance between one airline which has dragged itself up the ladder of customer satisfaction from being a strike-riddled loss-making state-owned airline to becoming a well regarded brand, with another airline which today is plagued with the ills that affected BA two decades ago, poses a formidable management challenge.

How long will it take for the same medicine to produce a similar turn-around at Iberia?  Is it indeed the same medicine that is called for in this case? What is the risk that fixing Iberia will prove a huge distraction which might dilute management focus and ultimately degrade the whole consolidated group ?


Investor’s Logic Versus Customer Benefits

A “Merger Project” document issued in 2010 by IAG describes in a fair degree of detail the legal structure, governance and ownership of the consolidated company, and indeed it seems the investment community still has faith in the substance of what IAG have set out to accomplish.  So far, the realization of synergies is reported to be on track, which is probably not too surprising given some of the inefficiencies that were plaguing Iberia at the start of the deal.


Willie Walsh InterviewIn a video interview posted in 2011 on the IAG website, IAG CEO Willie Walsh talks about the rationale for the BA / Iberia merger within the general consolidation of the airline industry, and the long term perspective this will produce for IAG.

He goes on to announce with understandable pride that IAG is on course to deliver on all its promises to its customers, such as better connectivity between the flight schedules of the two companies.  So on paper all looks fine, at least from the investors’ side. But is it really ?


The View from the Passenger Window

Since 1997 with the creation of Star Alliance, shortly followed by BA’s “Oneworld”, passengers have been taught to expect these alliances to offer some commonality in terms of service, comfort, product range and network coordination.  This development provided real customer benefits in terms flight connectivity and broadened the range of destinations that can be accessed through code-sharing arrangements.  It also allowed the airlines to share the cost of expensive infrastructure, airport lounges etc., thereby improving their cost/value proposition for the travelling consumer.

However, looking at what ultimately matters most to the air passenger, namely the flight experience itself (comfort of seat, cabin appearance and cleanliness, attentive staff, punctuality, food and beverage, entertainment, flight safety), the differences that exist between the airlines belonging to a same alliance remain significant.

Numerous passengers express surprise (and disappointment) when boarding a flight that bears a familiar number and prefix but turns out to be operated by a quite different airline.  It is reasonable to assume that passengers will expect an even higher degree of alignment between airlines that are co-owned rather than merely members of one same alliance, unless one brand is clearly identified as the charter or low-cost variant of the other.  Today, whilst from a business entity perspective BA and Iberia might be integrating towards being a more coherent business, one cannot overemphasize how colossal an effort remains to be made to provide the group’s passengers with a seamless experience when travelling and switching between those two airlines.

Airline Merger versus Airline Alliance

One struggles to see any end-user benefit yet arising from the BA / Iberia merger, in spite of Willie Walsh’s video statement.  Let’s take the example of a journey from London to Santo Domingo in the Dominican Republic.


The fastest routes are London-Madrid-Santo Domingo, and London-Miami-Santo Domingo. The route via Madrid, using BA and Iberia, lasts a total of 15:25hrs including a stop-over in Madrid. The route via Miami involves BA and American Airlines, lasting 16:50hrs including the Miami stop-over,  costs an additional £ 68 in business class compared to the Madrid route.

Willie Walsh would like the 10% time saving and £ 68 fare difference (rather negligible in regard to total cost) to be the decisive factors that will swing the customer’s choice in favour of flying with IAG-owned airlines.  Any passengers on board flight IB 3486 from Santo Domingo to Madrid on 19th February, onto which they had been rescheduled from a previously cancelled Iberia flight, and which crossed the Atlantic with blocked washbasin and toilet drains and soaked carpets in some areas, will now know they made the wrong choice…  And this does not even consider the risks associated with the stop-over in Madrid where luggage handling staff were partly on strike. Maybe an additional £ 68 would have been well invested for trouble-free travel on American Airlines and British Airways’ code-shared itinerary.

When Backstage Trouble Hits the Front of the Stage

In the above mentioned video interview, Mr Walsh quite remarkably states that “one of the real advantages of IAG is that we’re detached from the day-to-day operational challenges that the airlines face, which means we can spend more time focusing on the long term strategic issues“.  That’s really lucky for Mr Walsh, because beyond the usual airline worries about fuel costs and security, Iberia have a mountain of other operational issues to resolve and there is a true chasm between their company’s image and what the British Airways brand now stands for.

Iberia Riot
Iberia staff riot in Madrid airport

Let’s give credit to Willie Walsh and his predecessor Colin Marshall, who sadly passed away in 2012 as Lord Marshall of Knightsbridge, for having transformed British Airways from its former status of state-owned sloppy airline to what it has become today. So although I am not an airline expert beyond the fact that I fly between 80 and 130 times a year, I am confident that Mr Walsh not only knows what is right for his investors, but also understands what his customers expect and how to run an airline effectively. Even if things have not always been easy at British Airways and industrial relations are tense at times : there is a clear sense of “The show must go on” and customer service levels are maintained as much as possible, even through difficult times.

Iberia departure board 6th March 2013
Flight cancellations resulting from strike action by Iberia staff

Not so at Iberia, where the conflict has broken out into public display, prompting any reasonable air passenger to turn to other airlines to avoid the disruption, cancellations and general ill-ease of being served by such disgruntled staff. This can only compound the problems of the ailing airline into a downward spiral. The coming months will be crucial in determining IAG’s ability to manage industrial relations in a South European country where the rules of play are markedly different to those that apply in the UK.

A Sour Lesson from Past Experience

I trust Mr Walsh to be smarter than the management of Swissair who in the late 1990’s thought they could transfer the know-how, reputation and quality of what had until then been an exceptionally well regarded airline, onto a series of acquired entities to gain a pan-European or possibly global scale, resulting of the lamentable collapse of Swissair in October 2001.

Back then, based on a “hunter” strategy developed for them by McKinsey & Company to protect the airline against possible isolation resulting from Switzerland’s reluctance to engage in any form of integration with the rest of Europe, Swissair embarked (without the support of their consultants during the crucial implementation phase) on a series of investments or outright acquisitions of poor-quality often loss-making airlines, including Portuguese TAP and Belgian Sabena.

Swissair grounded Oct 2001
The end of Swissair – Oct 2001

Rather than testing and learning from one acquisition before broadening the scope of this aggressive growth programme, Swissair somehow thought that process improvement and a sense of quality would automatically percolate across their rapidly expanding group, thereby ignoring some of the most basic fundamentals of Change Management.

The high levels of debt resulting from the expansion programme, coupled with the management’s inability to simultaneously address the issues they faced very rapidly brought the emerging group to its knees.  The rest is history.

IAG’s ambitions are high.  The group is not just about the merger of British Airways and Iberia, but aims to acquire many more.  Willie Walsh said prior to IAG’s formation that he had drawn up a list of 12 possible partners from an initial pool of about 40 (source : Bloomberg).  BMI was snatched up when it became available, primarily for the purpose of obtaining more slots at London’s Heathrow airport.  But looking into the near future, contrary to the view he expressed in his 2011 video interview claiming he would maintain a high-level strategic view and not get sucked into operational matters, I believe that Mr Walsh and his team will now have to take account of some of the operational challenges they need to crack to “digest” the BA – Iberia merger before tackling the next big acquisition.

The dishes of a banquet cannot all be eaten together without the risk of a serious indigestion.