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A bitter saga

Shareholder concerns
A shareholder presentation by Sika’s management illustrates the extent to which the current acquisition offer has destroyed shareholder value both at Sika and Saint-Gobain

Whatever the outcome of the challenged take-over of Sika by Saint-Gobain, which was first announced in December 2014, there will be bitter lessons to be remembered in the future, and other companies whose capital structure includes shares with preferential voting rights might see their value plunge unless they can provide the clarity that is so obviously missing in the case of Sika.

When a minority shareholder holds the majority of the voting rights, that shareholder can unilaterally make decisions that serve self-interest but are seriously detrimental to the interests of the shareholder majority  –  and this is what is happening at Sika, whose founding family’s holding company owns 16% of the shares but 52% of the voting rights, allowing them de facto to do whatever they please.

An inevitable conflict of interest

German magazine BLICK asks how many jobs losses will be caused by what they describe as the Burkard family's appalling greed
German magazine BLICK asks how many job losses will be caused by what they describe as the appalling greed of the Burkard family (pictured above)

Saint-Gobain are offering a 78% premium for the stake of the Burkard family and it is easy to understand why that family is eager to accept the USD 2.9 billion they are being offered.  However, Saint-Gobain have no intention of making an offer on the rest of Sika’s capital; why acquire any more when their proposed acquisition of 16% of the capital will suffice to give them full control of the company.  It is hardly any wonder that the proposed transaction caused an immediate outcry from the remaining shareholders who claim that the deal should not be allowed to proceed unless a public offering is made for the remainder of the share capital.

Saint-Gobain and Sika are today direct competitors.  If the deal goes ahead, Saint-Gobain will only reap 16% of Sika’s future profits, therefore the synergies and any other benefits resulting from the acquisition will be biased to benefit Saint-Gobain far more than Sika, thereby weakening Sika and further undermining the value of the other shareholders’ investment.  These other shareholders include the Bill and Melinda Gates Foundation whose high profile has given the Saint-Gobain Sika deal worldwide exposure.  The Gates trust released a statement declaring that “the proposed transaction makes no strategic sense, is an affront to good corporate governance and is not in the interest of Sika’s business, employees, customers or public bearer shareholders”.  It is obvious from that statement that the Gates trust will fight tooth and nail to block the proposed sale. This is war.

The narrow interpretation of the law

Just like many other Swiss companies, and indeed companies across Europe, Sika’s articles of association contain a number of oddities, in this particular case an “opt out” clause which stipulates that a sale of 33.33% of the company’s voting rights can be made without an open public offer to bid for the rest of the capital.  As the Gates trust rightly states, this clause flies in the face of good corporate governance, but the Swiss federal administrative court confirmed on 1st September the opinion voiced earlier by Switzerland’s M&A Commission (COPA, Commission Suisse des OPA) that Sika’s opt-out clause is legal under Swiss law, according to which opt-out clauses must be challenged within 2 months of being introduced, after which they are binding. The only possibility of removing such a clause after that deadline is to modify the company’s articles of association, which requires a majority vote by the shareholders; quite a challenge when 52% of the votes are in the hands of the Burkard family who argue that investors in the company should have been aware of Sika’s share structure.

Nonetheless, whilst the COPA declared the opt-out clause to be legal, it did not attempt to clarify whether this particular instance the opt-out clause was being invoked in an abusive way.

New creative tactics and a criss-cross of legal challenges

With the opt-out clause confirmed as legal under Swiss law, but in theory still open to challenge as to whether it was being invoked in an abusive manner in this particular instance, the remaining shareholders sought other ways of proving that the Burkard family was serving its own interests to the detriment of the other shareholders and the company as a whole.  This was prompted by the Swiss trust fund ETHOS which requested at a shareholders’ meeting that the controversial opt-out clause be removed; the objective of that request was to prove that by opposing ETHOS’ proposal, the Burkard family was voting in self-interest and more importantly against the interest of the majority of shareholders.

To add to the confusion, it was unclear whether the special shares to be sold by the Burkard family were subject to the restriction requiring sales of more than 5% of the capital to be approved by the Board of Directors.  And in an separate further legal case, as the majority of the Directors are opposed to the transaction, the Burkard family is arguing they were prevented from using their full 52% voting rights to elect new Board Director and remove some of those in place.

In an additional layer of legal complexity, the Bill and Belinda Gates Foundation is now attempting to sue Urs Burkard, who represents the family and is the only member of that family on the Sika Board of Directors, for failing to act in the company’s best interest when he negotiated the sale of his family’s shareholding to Saint-Gobain.  Legal claims against specific members of a Board have a weaker legal basis in Switzerland than they would in the United States, and Urs Burkard’s spokesperson has so far dismissed the threat of such legal action.

So far, the only actors in this dramatic saga to benefit from the current criss-cross of recriminations and court cases have been the lawyers.

The final legal verdict vs. company reputation

Saint-gobainOn 15th September, the Swiss Competition Commission (COMCO) had little other choice than to unconditionally authorise the acquisition by Saint-Gobain of control over Sika, given the favourable ruling on that matter by the European Commission in July and the decisions made earlier by other competition regulators, particularly in China and in the USA.

Done deal? Not yet, mainly because of the on-going legal proceedings, but also because Sika’s directors and shareholders will continue to obstruct this acquisition by every possible means.  Initially, the deadline for closing the deal was set to year end of 2015, but that had to be extended to mid-2016.  A lot can still happen until then.

sika-logoUltimately, what might block the deal is the threat to the reputation of Saint-Gobain’s, whose share capital is largely in the hands of institutional investors who will not be impressed by Saint-Gobain’s contempt for shareholders.  If the deal goes ahead, Sika’s shareholders will forego the opportunity to benefit from the 78% premium being offered to the Burkard family, and face the prospect of future decline of their shares’ value. If the Bill and Belinda Foundation, whose backing of worthwhile causes is acclaimed the world over, is hit financially by the Sika Saint-Gobain transaction, Saint-Gobain may be faced with a well deserve torrent of negative PR.

Can a company hide behind legal court decisions to act unethically?  In theory the answer appears sadly to be yes, but if they do they will have to accept the consequences.

Food for thought …

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!

The CMA gives its provisional approval, after an initial cold welcome

Phase II of the regulatory review conducted by the Competition and Markets Authority (CMA) has reversed that body’s initial conclusions, which predicted that a number of stores would have to be sold to allow the deal to go ahead.  Now suddenly, the conclusions of this in-depth review which was started in May states that the proposed acquisition will not have any adverse impact on competition and will not be detrimental to the consumers’ best interest.

Within hours of the publication of the CMA’s conclusions on 25th August, the Poundland take-over of 99p Stores was presented in the media almost as a done deal, although the final deadline for all parties’ responses/submissions can extend until 16th September.  Having conducted a series of individual hearings since mid-July with Wilko, Savers UK, Iceland, B&M Stores, Poundworld, Morrisons, TJ Morris, Pepkor and Poundstretcher, the CMA now appears fairly confident that no new facts are likely to fundamentally contradict the evidence they have gathered thus far.

So why such a U-turn within 3 months?

Defining the “market”

inside-poundlandThe whole notion of market dominance is entirely dependent on how the market is defined.  The commission’s panel has concluded that “customers would not face a reduction in choice, value or lower-quality service as a result of the merger“.  A reduction in choice between what and what?  After the merger, Britain will be left with only one major single-priced retailer, hence the CMA’s initial apprehension, but is that the environment within which consumers make their choice?


The CMA’s phase II review redefined the market from a consumer’s perspective, understanding how shoppers make their choices within the broader universe of “value retail”, and extending beyond the narrow definition of Single Price Point (SPP) retailers such as Poundland and 99p Stores to also include “LADs” (Limited Assortment Discounters, such as Aldi, Lidl or Iceland) and “VGMs” (Value General Merchandise retailers like Home Bargains, Poundstretcher etc.).  In doing so, Poundland together with 99p Stores move from being “the market” to only being a fraction of that larger competitive set.  Adding into that mix massive retailers such as Tesco and Asda, who also run fixed price point promotions, and suddenly Poundland’s £ 55 million acquisition of 99p Stores almost pales into insignificance.  Q.E.D. : let the deal go ahead!

Is it really that simple?

Defining the competitive set within which the users of a product or service make their purchasing decisions is not an easy task, and will always remain somewhat arbitrary.  When Guinness Plc and Grand Metropolitan Plc merged, a long debate took place in 1998 with the regulators in Europe and North America as to whether Gordon’s, Tanqueray, Booths and Bombay Sapphire should be viewed as operating within the narrow definition of the gin market, or whether consumers see them as alternatives to other brands in the vast “white spirits” market which includes categories such as vodka and white rum.  In this instance, the narrow view was upheld, and this resulted in requirement to dispose of Bombay Sapphire.

Likewise, within the whisky market, which includes Scotch, Bourbon, Canadian as well as whiskies produced in vast quantities in Asia and elsewhere, the regulators singled-out premium Scotch whisky as a market in its own right, as a result of which they deemed it unacceptable for Johnnie Walker, J&B and Dewar’s to be owned by one single company, following which Dewar’s was divested.

So is it about choice or price?

Possibly the best way to understand the regulators’ thinking is to view “choice” as a moderator of pricing.  If consumers view Scotch whisky as a more prestigious category than, say, Thai or Indian whisky, then owning a significant share of total Scotch whisky premium products can offer the potential to influence pricing upwards to fully capitalize on that favourable image, and even lead the way for lesser competitors within the segment to follow suit, in the absence of the pressure that would otherwise occur in a more fragmented market.

In the specific case of Poundland and 99p Stores, the very concept of single point pricing precludes the possibility of increasing prices, hence another reason not to fear that the merger of these two retailers will pose any threat in the short or medium term to the consumers’ interest.

It is a good thing for Poundland and 99p Stores that we are currently living a period of very low inflation.  I wonder what will be on offer for £ 1 or 99 pence in ten or fifteen years from now …

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.


Once divorced, twice engaged

verizon-aolThe news that AOL is about to be acquired by telecommunications giant Verizon reminds me of the box-office hit of the 1990’s “Muriel’s Wedding”, that charming tale of an unattractive Australian desperate would-be bride who relentlessly pursues her dream, turns out to be a beautiful sensitive person but gets faced with the harsh realities of life.  AOL’s name will always be associated with one of the biggest M&A fiascos, resulting in the split-up from Time Warner after just under 9 years of a very troubled union.

Then, for years, AOL kept looking around, and towards the end of last year, AOL’s repeated flirting with Yahoo! gave the impression that something was about to happen.  That was only until last month when AOL’s chairman and CEO Tim Armstrong declare a merger of his company with Yahoo! to be a “dead notion”.  Why?  Simply because he was about to announce two weeks later that AOL was getting engaged to Verizon.  A succession of twists in the plot that makes the story almost fit for a TV soap opera…

So what’s in it for whom?

Tim Armstrong’s strategy for AOL focuses on achieving growth through supply (network), customer data, and video / automated ads.  The video business alone grew by 90 percent in 2014 and that of course provides an increasingly attractive platform for advertisers.  Everything would be perfect if it were not for the fact that an ever growing share of on-line media content is being consumed “on the move”: mobile is the magic word.  Verizon’s dominant position on the USA’s East coast makes that company the unavoidable partner to pair up content, customer data and mobile access.

This is good news for advertisers, who will have a means of broadcasting their messages to finely targeted audiences; and evidently good news also for both Verizon and AOL who can charge more for the efficient communication channel they are providing to the advertisers.

Some consumer groups, however, are vocal about their fear that gathering data on individual’s preferences, habits, life-style and whereabouts, as monitored by their on-line activity and mobile location, is an unacceptable intrusion into anyone’s privacy.  Some lobbyists are using this argument to try to block Verizon’s acquisition of AOL from going ahead.  This is unlikely to have much impact, however, as the regulatory authorities are more concerned about any detrimental effects on competitiveness than about the private sphere of individuals: Verizon and AOL’s revenue will increase as a result of charging more for advertising, not from jacking up the users’ subscription fees.

Does it matter anyway?

privacyIf we must be subjected to advertisements whilst watching a movie, following a sporting event or viewing news up-dates, I personally prefer such ads to be relevant; so I would not be too fussed if an ad for a physical activity tracker appeared on my screen, because I have been comparing such devices on-line lately and intend to acquire one to better monitor the calories I burn.  But to some people, this may seem freaky, as if someone is permanently looking over their shoulder.

To those who feel uncomfortable with the amount of customer data that is being used commercially, I suggest focusing strongly on Google and Facebook who currently dominate on-line advertising with revenues of USD 58.7 billion and USD 12.4 billion in 2014 respectively.  Both of those companies go one step further in commercialising their customer profile data, as many other websites now offer viewers to log-on using their Google or Facebook ID and password.  What better way to instantly communicate to a seller all that needs to be known about the person who has just started browsing his website.  Could we ever imagine anything similar when a potential customer walks through the door into a shop?

Prepare the wedding bells

Given the dominance of Google and Facebook in the on-line advertising world, throwing a few credible new competitors into that market should not cause much harm, quite to the contrary.  So let’s assume that the Verizon – AOL deal will go ahead.

Meanwhile, where and how the customer data collected by such companies gets used is a matter for parliaments to debate and legislate rather than for the competition regulatory authorities.  Clearly this is not an easy task since as the whole debate is torn between two opposing objectives: on the one hand there is a desire to protect the citizens’ privacy, but on the other hand governments are increasingly trying to snoop into our daily activities to detect the one in a million citizen who turns out to be a dangerous terrorist.  So far, the snoopers appear to have the upper hand, convinced as they are that the risk of being caught in dramatic events can be reduced to zero, and they will continue to do so until citizens accept the sad fact that some very unlucky people can end up being in the wrong place at the wrong time.  It is called fate.

On course for becoming the world’s number one

Last April when Holcim and Lafarge announced their intention to merge, I was not the only one to predict that this mega-merger project would be a feast for the anti-trust regulators across the world, and indeed it has been.  However, given the complexity and magnitude of the deal, we must acknowledge one year down the road the accuracy with which the outcome of the regulatory process has matched the two giants’ advisors prediction as far as Europe is concerned.

HOLCIM Y LAFARGE ASEGURAN QUE SU FUSIÓN NO IMPLICA EL CIERRE DE FÁBRICASJust over a decade ago, uniting Holcim and Lafarge would have been unthinkable.  Regulators used to spend their time and energy scrutinizing the cement industry to detect any signs of collusion between the key operators of what had already been an oligopoly for many years.  But in today’s global scale economy, European regulators have become less shy about allowing the formation of giant companies capable of capturing sizable shares of the market in major European countries; after all, Europe needs a few such global heavy-weights to avoid being completely dwarfed by Asia and the Americas.

Lafarge’s spokesperson mentioned last April that they and Holcim were expecting to have to divest up to 15% of the new group’s assets to secure the anti-trust authorities approval of the deal and this is where they now stand, having received the approval of the EU anti-trust authorities on the condition that a sale of that magnitude is made before the two giants proceed with their merger.

Biggest hurdle removed

It was always clear that the bulk of divestments required by the regulators would be within Europe, and many external observers (including myself) feared that obtaining an acceptable price for the sale of cement business in Europe’s saturated market might prove difficult or impossible.  Divesting European assets piecemeal would have been lengthy and risky, delaying and possibly jeopardising the whole deal as the sale of all those assets was a pre-condition set by the EU antitrust regulators.

Holcim and Lafarge’s decision to auction the assets as a bundle was risky but has now paid dividends.  The presence on the market of a single acquirer interested in taking on those assets as a bundle has secured the value and clarified the time-line of the merger.  The Deus ex machina who has offered EUR 6.5 billion for the bundle is Cement Roadstone Holdings, better known as CRH, whose insatiable appetite for acquisitions has made the whole Holcim – Lafarge deal possible.

Just when everything is looking fine, someone spoils the game

india_cementWhereas the course of events in Europe has followed a well predicted roadmap, the unpleasant surprise on the path to Holcim and Lafarge’s union has now come from India where the regulators fear that the Holcim – Lafarge deal would cause a serious imbalance on their very vast and growing market.  In an interesting and quite unusual move, India’s CCI (Competition Commission of India) required Holcim and Lafarge to publish the details of their proposed deal on their respective websites as well as in a selection of national newspapers, so that every interested party in the Indian subcontinent could have access to the relevant information and be given sufficient time to formulate comments and possible objections.  This is only the second time that a merger proposal is submitted to general public scrutiny under Section 29(3) of India’s Competition Act, 2002.

The CCI delivered its decision earlier this month, allowing Holcim and Lafarge to proceed with their merger provided assets including large limestone reserves situated in eastern India are divested.  There is a welcome proviso, however, in that these assets do not necessarily have to be sold to a competitor, consequently these forced divestments might still fetch a price which will not cause Holcim and Lafarge to cringe.  They now have 30 days to respond to the CCI’s decision.  India was not on the regulatory radar screen of Holcim Lafarge; this will have been a nasty surprise but is unlikely to be a show stopper at this advanced stage of the game.

Some players have won before the lottery is drawn …

Far from the challenges and uncertainty that lay ahead for Holcim, Lafarge and CRH, some of the players involved in this giant M&A scheme can already shout : “BINGO”.  The number of transactions involved in the pulling together of Holcim and Lafarge, and the added opportunity of overseeing the divestments that will be required to allow the merger project to complete, are an absolute bonanza for all the banks and investment houses involved in advising the two players.  Can you spot anyone missing in the impressive list of those who have advised Holcim, Lafarge and CRH:  UBS, Bank of America Merrill Lynch, JPMorgan Chase, Davy Group of Ireland, BNP Paribas, Morgan Stanley, Zaoui & Co, Rothschild, HSBC, Credit Suisse and Goldman Sachs.

… for others, the work has only just begun

Hopefully better times ahead for CRH after their staff demonstration in 2012

CRH’s EUR 6.5 billion acquisition provides them with a series of businesses in Europe, as well as in Brazil, the Philippines and Canada; a golden opportunity to leap ahead on their very ambitious growth curve. CRH are serial acquirers, well accustomed to integrating the companies; the Irish company of the 1970’s has become a global player, with some previous experience of acquiring businesses from Lafarge in recent years.

According to the Financial Times, CRH has spent some USD 24 billion on approximately 650 acquisitions since 2000. However, the acquisition of the Holcim – Lafarge bundle will be of a magnitude they have never experience before.  Growing one’s business by 33% in one single step is no easy task.

As for Holcim and Lafarge, their merger remains incredibly ambitious, with this future world leader set on transforming the whole industry with products and concepts that may revolutionise modern construction. A lot of interesting developments to be observed over the coming two or three years.


And exciting 2015 looms…

In recent weeks, early signs of big changes to come in the UK’s telecom landscape have sparked off speculation as to which of the key players might join forces, or possibly even quit the UK scene to re-invest elsewhere.  Why now?

UK consumers and businesses enjoy one of Europe’s most competitive Telco market, due to the number of operators and presence amongst them of some game changers, such as Talk-Talk, who upset the cosy rules that prevailed on the market when British Telecom had to give up its monopoly.  Such competition obviously leads to meagre margins, and the belief of many of the operators is that end-users need to be offered a “bundle” of services, covering fixed and mobile telephone, internet access and on-line TV content.

logo_telecomsJust in the same way mobile phone tariffs are difficult to decipher, those all-in-one “quad” service bundles blur the cost of each of the services; and so the proliferation of such bundle offers in recent years is possibly better explained by the fact that they protect the operators’ margins rather than offer the end-users any tangible benefits.  If that were not the case, the take-up of these new bundle offers would have seduced more than the current 17% of users who have subscribed to them.  Selecting a common supplier for fixed telephone and broadband makes logical sense, particularly with the generalisation of voice over IP, but I strongly suspect that the choice of mobile provider is also strongly influenced by territory coverage (which is still quite imperfect in the UK), roaming tariffs and the choice of features offered by the operator, rather than a supposed simplification resulting from having just one supplier for all of the services.

Join forces, stay as is, or quit?

Telecom operators have not had it easy in the last few years; websites and on-line applications require ever increasing flows of data as digital content is consumed through real-time streaming, forcing the providers to offer ever-growing bandwidth for which the end-users are not prepared to pay any more than they did in the past.

Whilst the strong competition that has prevailed thus far in the UK has created a very favourable environment for end-users by keeping prices down, the margins generated on the UK market are probably insufficient over time to allow the massive and continuous investments that will be required to satisfy the users’ appetite.  If bundling fixed telephony, broadband access, mobile telephony and digital content is the only way of protecting the revenue required to growth further and survive in this very demanding market, dedicated mobile operators such as Vodafone, O2, Three or EE, will need to seek alliances to gain presence across the spectrum of telecom services, and this will require them to have cost effective access to fibre networks.

Vodafone has already taken a few steps in that direction with the recent acquisition of Ono in Spain and Kabel Deutschland, so it would only be logical for that company to seek a similar move in the UK to build further on its 2012 acquisition of Cable & Wireless.  Current speculation about Vodafone making a bid to acquire Liberty Global, which operates Virgin Media in the UK as well as very high-speed broadband networks in ten other European countries, would allow Vodafone to leapfrog ahead of its competitors. If the regulators don’t object to such a concentration of control over fibre networks in Europe, the other players will be forced to either rent the networks owned by BT or Vodafone, or pull out of the British market.  Building an alternative broadband fibre network would be another possibility, but it could prove prohibitively costly, unless that third offering were limited to a few large conurbations where the density of users might justify the huge investment.

One thing is certain.  If Vodafone teams up with Liberty Global, the other mobile operators will not survive on a status quo and will be forced to move.

Exit the UK market, really?

What would have sounded inconceivable a year or so ago is becoming a distinct possibility; or at least it is envisaged by EE, the joint venture of Orange and Deutsche Telekom, as well as by O2.  Both companies are reported to be exploring the possibility of selling their UK businesses to BT and exiting the exceedingly competitive British mobile business, to seek their fortunes elsewhere, in countries where a consolidation of fixed and mobile telephony with broadband networks may be easier to achieve rapidly.

If the so-called “quad” bundles of services are really the panacea that will allow telcos to thrive in Europe, then something big is likely to spark-off during 2015, but the magnitude and complexity of any deal, as well as the scrutiny to which such deals will be inevitably submitted by the regulatory authorities, means that the European telecom landscape may take much longer before any radical change really materialises.

A lasting rumour may be turning true

AB InBev, the giant that towers over the global brewing industry and is more of an M&A machine than a beer producer, is believed to be preparing to bid for rival SAB Miller in what could be a deal exceeding $120 billion.

The group, which developed at an exponential rate over the last decade, began with a fairly modest acquisition 25 years ago of a local Brazilian brewery for $60 million, and has been snapping up its competitors regularly ever since.  The first quantum leap occurred in 2004 when Ambev was combined with the Belgian based group Interbrew.  The result was a formidable M&A engine that won a hostile bid to take-over Anheuser-Busch for the handsome sum of $ 52 billion in 2008, propelling the group to the world’s Nr 1 position.

Conventional wisdom would say that this is where the game ends.  Not so for AB InBev who have had their sights on market’s Nr 2 SAB Miller for some time.

Could so much beer give the regulators a hang-over?

ab_inbev_brandsAB InBev’s power is very much centred in the Americas, where the growth prospects of a mature beer market are slowing down, whereas SAB Miller enjoys a very strong position in those markets that still have the potential to fuel substantial growth, notably in Africa.  Consequently, although the combined group would be capturing around 30% of the overall world market for beer, the only area in which the combined market share is likely to be considered excessive is North America where SAB Miller could be asked to divest brands that currently enjoy a strong market position, such as Miller Coors, without causing a significant dent in its presence in other geographies.

An unwilling bride

The key factor preventing AB InBev from snapping up SAB Miller is the latter’s resistance.  To protect itself, SAB Miller tried earlier this year to repel the prospect of being taken over by AB InBev by bidding for the other giant of the beer industry: Heineken.  However, that bid underestimated the fact that Heineken has a controlling shareholder who takes pride in the global brand’s independence and firmly intends to keep it that way.  Consequently, SAB Miller will not reach the big fat size it was hoping for to avoid being swallowed up by AB InBev, and as recent history has shown us, AB InBev is not one to be discouraged by the reluctance of its acquisition targets: their successful hostile take-over of Anheuser Busch in 2008 showed the world that the unthinkable can indeed happen.

Sending out confusing signals

All the noise surrounding SAB Miller has boosted that group’s share price by 40% since the beginning of the year, and shares in AB InBev rose to a record level on 19th September, fuelled by the market’s expectation that a bid to grap SAB Miller, if launched officially, could well succeed.  In that context, the news that the group’s Chief Strategy Officer and several other high-ranking directors of AB InBev sold significant stakes in their company earlier this month sent out a rather confusing message to the market.  For some, this could be a sign that AB InBev has thrown in the towel, at least temporarily, and will not press on to acquire SAB Miller.  On the other hand, this could also be a ploy by AB InBev to relieve market pressure and let the SAB Miller’s share price slip back to a more sustainable level before pouncing again on its target.

After all, the directors who sold some of their AB InBev shares have earned a handsome profit in doing so, and if they renew their attack on SAB Miller in a few months again, they will profit a second time on the remainder of their shareholding.  So this is a little game which can hardly go wrong.

A big Goliath, many healthy vigorous small Davids, and nothing in between

ab_inbev_logoAB InBev have built and demonstrated a remarkable ability in the area of cost cutting; there is no doubt that an acquisition of SAB Miller could generate further significant savings that would make the $120 billion deal worthwhile – after all, the guys at the helm of AB InBev have become absolute masters in the art of M&A and have not so far ever got it wrong.  It is quite appropriate that AB InBev’s logo should include a hawk…

The fact that Anheuser-Busch, Bass, Beck’s, Corona, Presidente, Grolsch, Bavaria, SAB, Miller and Foster’s could all belong to one same group does not seem to worry consumers who still have their personal preferences for one of several brands of this vast portfolio.  Indeed, the scale achieved by AB InBev alone allows the group to invest in developing new brands, new tastes and fashions, that will continue to enjoy a strong brand equity that sets them apart from the mainsteam products of that industry which are almost a commodity.  And next to the mammoth giants of the industry, there is still plenty of space for more and more local specialised “craft” breweries to sprout up everywhere, appealing to consumers that see themselves as more discerning, and providing a sense of authenticity in contrast to mass produced global brands.

Those who will feel the pinch, and either get engulfed in the AB InBev maelstrom in coming years or go bust, are those local or national brewers that are “neither here nor there”, who cannot claim grassroots authenticity in their local community and do not have the scale of the giants.

But in the meanwhile, let’s go to the local pub and make bets on the outcome of AB InBev’s next move, around a few beers…

Consumers’ interests acknowledged

For almost a year, ever since announcing their intention to merge and become the world’s largest airline (admittedly they never promised to become the best), United Airlines and US Airways have behaved as though this was a fait accompli.  But the Justice Department saw things another way, forcing the two airlines to abandon their dream.


I shall remember for a long time the frustration I felt on June 11th in Washington DC’s Dulles Airport when, arriving from London on a delayed United Airlines flight, a number of stranded passengers were waiting in line with me, surrounded by banners hailing the advent of the world’s largest airlines, when late at night United Airlines only had one single person at ground staff to attempt to rebook those passengers that had missed their connections and who, like me, were offered no alternative other than to sleep on the airport’s benches.

United Airlines could not, for whatever reason, re-book me on an early flight on the next morning on US Airways, their future merger partner, and sent me to the other end of the terminal to negotiate a flight ticket there, but there was nobody at their desk.

Shaking hands over a deal that shall not be

And so maybe it is time to hold airlines to account and request that the service they provide to their customers resembles in some way the claims made in their advertising campaigns.  Clearly, the pressure on airlines to contain their costs is harsh, but reducing the competition between airlines on key routes would allow service levels to drop to unacceptable levels.  It was bad enough on the return transatlantic flight (delayed by four hours) to have to wait 50 minutes after take-off in business class before even being offered a beverage (most passengers including myself had fallen asleep well before any dinner was served).  The very kind and apologetic flight attendant was apologizing for the fact that there were only two of them to attend to a full business flight cabin…

Lack of competition in the airline industry can already be felt within some of the alliances, and the impact on fares for routes that are operated by several operators all belonging to one same alliance is already clear to see. Merging companies would only reinforce what is already an oligarchy when it comes to setting air fares.

The only measure that can effectively counteract a continuing fall in customer service standards is to maintain a healthy level of competition.  A big thank you to the Justice Department for having understood this and threatened legal action against United and US Airlines if they went ahead with their merger plan, in order to preserve what they called true market-driven competition.

Greater clarity regarding the merging of major airline operators

United and US-Airways, now turning their back on each other
United and US-Airways, now turning their back on each other

For many years, there was clear opposition against the merging of major airlines, but by 2006 it became clear that something had to change in the airline industry after some of the major players had collapsed.  This prompted the authorities and justice experimented a little in that field, allowing Continental to merge with United, Northwest to joint Delta, and US Airways to merge with American West.  But now, two of the above mentioned airlines turn up again for a second round of mergers and this has clearly prompted new thinking.  Breaking away from a trend which had been taken for granted, the Justice Department is now saying “enough is enough”.

Back to the drawing board

United Airlines have lost almost $ 1 billion since the merger deal was proposed last year.  US Airways is seeking ways to remain competitive in an increasingly competitive industry.  Further mergers between any of the top-top players are unlikely to be given the green light in the foreseeable future; so this means that the further consolidation of the industry will need to focus on sweeping up some of the small or medium sized players, and this is clearly the focus US Airways will be taking.

Loss-making United Airlines had probably best concentrate on fixing it’s own structure, costs and offering rather than add a further layer of complexity to the business by grafting on some other airlines onto its already ineffective business.  With little left to save on costs, it is surprising that no major airline in the United States has attempted to differentiate itself on service.  From my recent experiences with United Airlines, it would not take much to make flying with them a more pleasant experience than it is at the moment.  Probably not very costly to implement, and with a guaranteed noticeable impact for their customers.  This could be a good place to start.

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.