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AB InBev SABMiller logo

Energy and persistence conquer all things (Benjamin Franklin)

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

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

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

A foreseeable domino effect on the beer market

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

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

Global market share of five biggest beer companies

Anheuser-Busch InBev – 20.8%

SABMiller – 9.7%

Heineken – 9.1%

Carlsberg – 6.1%

China Resources Enterprise – 6%

Source: Euromonitor, based on 2014 figures

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

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

Africa : two different interpretations of public health

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

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

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

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

Money now vs. safeguarding against a possible longer term threat

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

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

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

Similar origins – different trajectories

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

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

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

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

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

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

Radical change for Ferrero too

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

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

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

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

Seeking the common ground

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

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

Meanwhile, an imaginative competitor is succeeding where Thornton failed

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

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

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

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

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

So what’s next?

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

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

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

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

Told you so …

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

Visualising the end game

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

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

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

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

Preparation, preparation, preparation

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

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

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

Maintaining focus

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

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

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


Two European giants with global reach

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

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

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

A feast for the anti-trust regulators

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

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

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

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

An ambitious business case

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

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

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

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

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

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

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

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

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

All the fun without the burden of commitment

Reckitt Benckiser, owners since 2010 of the famous Durex® condom brand it acquired from SSL which played a major role in enabling the sexual revolution in the 60’s and 70’s, announced this month it was to acquire the rights to the K-Y® brand of lubricants from Johnson & Johnson.  The obvious affinity between these leading condom and lubricant brands is thus soon to be sealed in a commercial union.

"The Small Family Car", a cheeky advertising caption which caught the public's attention in the late 1970's and formed the base for Durex's sponsorship of Formula 1 racing ever since
“The Small Family Car”, a cheeky advertising caption which caught the public’s attention in the late 1970’s and formed the base for Durex’s sponsorship of Formula 1 racing ever since

This acquisition does not include any of the assets or staff of the current manufacturer, Johnson & Johnson owned McNeil-PPC, as that company will continue to supply the K-Y branded products to Reckitt Benckiser under the terms of that deal, which is due to complete by mid-2014. No complicated transfer of assets, no guarantees regarding future employment levels.  Doesn’t this just sound  so Durex®:  all the fun and benefit without any risk of being burdened with potential commitments…

A condom manufacturer not averse to cross-fertilisation

K-Y® is big business, generating worldwide sales exceeding USD 100 million in 2013, with the USA, Canada and Brazil being its key markets accounting for 70% of total turnover.  At age 97, this is undoubtedly a very vigorous brand, which experienced a quantum leap in 1980 when the formerly prescribed product was given the right to be sold over the counter. It has enjoyed a healthy performance ever since.

Durex®, with its 30% share of the global branded condom market, is evidently a key player; bringing these two leaders together obviously creates, as announced by Reckitt Benckiser, a unique portfolio of brands in the sexual wellbeing category, particularly in North America and Brazil where the Durex® brand will be able to piggy-back K-Y®  (no pun intended).

Whilst it is too soon to say whether K-Y® lubricants are set to replace Durex Play®, it is easy to imagine the launch of K-Y® condoms building on the strength of that brand in the Americas, and the Durex® brand appearing on K-Y® products in Europe and Asia.

The future of intimate lubricants on a slippery path?

About a decade after the first concerns were expressed regarding the safety of intimate lubricants and potential side-effects resulting from their use, Reckitt Benckiser’s acquisition coincides with a resurgence of those concerns prompted by statistics showing that human infertility has reached all-time record levels.

The Love Machine, as envisioned by Johnson & Johson: running smoothly with a little help from K-Y Jelly
The Love Machine, as envisioned by Johnson & Johson: running smoothly with a little help from K-Y Jelly

One of the key worries is that most intimate lubricants are acidic, with a pH ranging from 7.0 to as low as 3.5; that is well below the 7.0 to 8.5 range which the World Health Organisation deems to be most favourable for the survival and mobility of human semen.  Some condom users will greet this as good news, as the use of these acidic lubricants further reduces the risk of an unwanted pregnancy. On the other hand, market data suggests that couples who are seeking to procreate account for a high proportion of lubricant consumption, as these are used to compensate a natural insufficiency, the latter being the consequence of age as people tend to have their children later in life, as well as everyday stress which is worsened by the anxiety that follows repeated failed attempts to conceive.

More worrying, regardless of whether a couple is seeking to conceive, or wishing to avoid an unwanted pregnancy, or simply uses lubricants as an enhancer, it appears that the majority of intimate lubricants contain a range of irritant or unhealthy ingredients which can easily transfer to the bloodstream through the mucous membrane faster than they would upon contact with outer skin or through oral ingestion (source: The Ecologist, Oct 2007).  Interestingly, very few lubricant manufacturers bother to list the product’s ingredients on the packaging, so consumers concerned about those undesirable substances and their side-effects will find it difficult to make informed choices.  On the flip side, some brands of intimate lubricants do not contain any of those nasty substances; those brands are beginning to make a point about it in their advertising claims. This is likely to give further prominence to the issue and raise the general public’s awareness.

In an era in which consumers are increasingly inquisitive about the additives hidden in the food they ingest, it would make sense to give some further attention to the substances which are absorbed through other sensitive parts of the body.  There may come a day when legislation will force manufacturers to disclose what lies in the bottle, from mucous irritants such as glycerine and sodium benzoate, to oestrogen mimicking parabens, cell wall disrupters such as glycols, or the use of mineral oils.

After tobacco and alcohol, if health warning labels begin to appear on condoms and intimate lubricants, consumers will be left to wonder whether there are any pleasures left in this world that pose a serious threat to life!

Opportunity to be seized

There are two sides to every coin.  The Durex® brand name, which has evolved over the decades from being a contraceptive to becoming synonymous with safer sex, could actually make good use of those solid credentials by lending its name and image to an all natural K-Y® lubricant, the truly safe option.  This would, in addition to the improved routes to market provided to Durex® by K-Y®’s omnipresence in North America and Brazil, pave the way to larger profitable sales of intimate lubricants in the increasingly health- and ecology-conscious markets of northern Europe.

These are still early days, so let us wait for Reckitt Benckiser’s deal to complete this summer and for the new owner of the K-Y® brand to reveal its plans for the alliance between the Durex® and K-Y® brands, because that’s when the rubber hits the road.

The USD 35bn mega-merger announcement on 29th July of Omnicom and Publicis showed their Chief Executives John Wren and Maurice Levy both jubilant and evidently excited at the prospect of being at the helm of what is due to become the world’s largest marketing services business. The news failed however to generate the same level of excitement amongst their shareholders, as demonstrated by the insignificant 0.25% rise in the shares of Publicis on the Paris stock exchange, reflected by a similar lack of reaction in Omnicom’s share price on the other side of the Atlantic.

Is there a real business case behind this merger ?

Some analysts are predicting a wave of other mergers and market consolidation, as a domino effect following the Omnicom Publicis merger, but so far market opinion does not appear to share that view. Beyond the emotional hype, rational reasoning would lead us to thing that once a marketing company has reached a respectable size and quasi global presence, there is probably no compelling business case to justify a further quantum leap in size to become the behemoth of the marketing and advertising industry. Nonetheless, Publicis’ Maurice Levy argues that this merger is necessary to compete with digital giants such as Facebook or Google (a strange statement indeed as Google is currently a customer of Omnicom).

Levy goes on to say “if we want to create a portfolio of tools for our clients and not have them in the hands of other players, which is not in the interest of our clients, we had to do this deal”. That is a very altruistic way of positioning the aim of the merger, although I suspect that both Omnicom and Publicis each have the scale required to develop the said portfolio of tools. If that had been a sufficiently convincing explanation, the shares of both Publicis and Omnicom would have jumped on the stock exchange yesterday. That did not happen.

Playing down the conflict of interests

The sheer size and breadth of the combined group will mean its client base will comprise a number of fiercely competing brands which are unlikely to feel comfortable cohabitating under a same roof: is it really conceivable for a marketing group to have intimate knowledge of the strategic plans and consumer insights of The Coca-Cola Company whilst doing the same with Pepsi? And how about Nestlé versus Mars, or Microsoft versus Google?

Of course John Wren and Maurice Levy must have experienced an adrenalin kick when they made their announcement : the very thought of knocking Sir Martin Sorrell off his pedestal, as Chief Executive of the world’s current #1 marketing company WPP based in London, must be quite thrilling for these new Franco-American allies. But we have yet to see whether this mega-merger will be anything more than the personal pursuit of two robust egos; that is: if it actually comes to fruition. On the positive side, the regulatory authorities might see an advantage in having a new heavy-weight on the market, particularly in the media buying sector which is dominated by a single player in many countries, but the real hindrance to realizing this merger is the threat of losing the significant marketing budgets of competing global brands.

These will be interesting times ahead for Omnicom and Publicis as they engage in the triple act of convincing regulatory authorities, shareholders and their clients of the benefits of the merger: shareholders vote by raising their hand, but clients can vote with their feet.

Business Case and Hypotheses – Science and Beliefs

Literature on mergers and acquisitions tells us that M&A is all about growth, either by gaining clout, entering new markets, new channels, new product lines, acquiring know-how, licences, intellectual property, or a combination of the above.  In spite of all the rigour, methodology and risk mitigation that go into choosing the right candidate for a merger or acquisition, some of the assumptions underlying the business case will always remain an act of faith.  My view of the future is unlikely to be identical to yours.

At a corporate level, we see the likely end-result of such gaps between expectations and reality in the acquisition of SANYO by PANASONIC as recently as 2009 (late 2008 to be precise).

Shall I drown you – or do we both die together ?

Panasonic, for whom Sanyo was a rival in many segments of consumer entertainment electronics such as video cameras and sound systems, was expecting to gain significant market share by acquiring that household brand, and more specifically to enter the lithium ion batteries and solar panel markets which they believed to have brilliant future with the emergence of portable electronic devices and growing focus on renewable energy.

Only four years later, with the powerful but rather unhelpful benefit of hindsight, we can contemplate the extent to which Panasonic’s underlying hypotheses turned out to be wrong.  The combined impacts of a strong yen, a slump in the sale of digital appliances after the amazing year-on-year growth fuelled by smart-phones, strong competition from Korea in the lithium ion batteries industry and China churning out solar panels almost at the speed of the solar rays with will capture, Panasonic finds itself today having acquired a sinking ship.  The Japanese government may be driving a policy aimed at reducing the value of the yen, but it would require far more to put Sanyo on a firm footing on the global market.

Whereas it would in the past have taken many years, possibly a couple of decades, for a large industrial conglomerate to decline and disappear from the market’s radar screen, we now see the extent to which the cycles of corporate growth or decline have accelerated.  The acquisition target which seemed so attractive only four years ago is now a burden.  Panasonic plan to cut 90% of Sanyo’s global workforce over the next three years: with that kind of pruning, it is likely the Sanyo name will disappear altogether.

Since the ill-fated acquisition of 2009, Panasonic has already attempted to refocus and simplify its business by selling all its non-Japan and China white-goods operations to Haier of China.  The divisions producing domestic electrical appliances are to be sold to Whirlpool.  The once almighty Sanyo corporation is being sold bit by bit, just as one deconstructs a castle made of Lego.

What was thought to be a great business case initially has turned out to be a nightmare for Panasonic’s leadership.  The business case built in 2008 and due diligence based on the “as is” valuation evidently failed to consider the robustness of the underlying assumptions regarding future growth, competitor activity and the evolution of the global economy.

And so as the two brands struggle to keep their heads above the water, it seems that one of them will push the other below the water-line to remain above the surface. I wonder what the Sanyo’s founder Toshio Iue, who at one point through family ties had come close to joining the lead at Matsushita, would think today of the epilogue of his legacy.

Not a brilliant story, but definitely one from which learnings need to be captured.

Yahoo! chief executive Marissa Mayer’s move to acquire the blogging website Tumblr for an astonishing $ 1.1 bn is indeed a bold one.  As a former Google executive Ms Mayer hopefully knows things about what makes a website “cool” and fashionable which we other mortals ignore : how else could one explain the rationale behind paying a premium of $ 300 million above the previous valuation of Tumblr ?


I felt some reassurance reading Ms Mayer’s statement declaring that Tumblr would continue to operate independently so as “not to screw it up”.  More importantly Tumblr’s co-founder and 26 year-old chief executive Mark Karp will remain at the helm of Tumblr – or that is at least the initial intention.  Indeed, the huge challenge in this deal will be to insure that Tumblr with its young boss and 125 strong team who probably revere him as an icon – quite justifiably – can maintain the buzz, energy, creative enthusiasm and ability to “break the conventional rules” which characterize the most successful companies of the internet age.

The colour purple – will it run in the wash ?


I don’t subscribe to the view of those who believe that every bubbly creative exciting entrepreneurial company is doomed to becoming a boring fat corporation if it grows much larger, victims of its own success.  Huge companies such as Apple and Google are proof to the contrary, as is Virgin Group if we look beyond the frontiers of the technology sector; but it is true that those iconic companies are the exception rather than the rule.

Unsurprisingly, Tumblr’s users are sceptical, as evidenced by tweets of “No, no, no, nooooooo!” and “Tumblr is about to suck”.  Young Mark Karp is trying to reassure them, stating that “We’re not turning purple”.  I like the analogy, and personally I would be weary of mixing bright vivid colours with dark purple in a same wash-load …

When a high buzz “cool” company is united with another that has become lacklustre over the years, does the former’s “coolness” revive the dull company, just as an antibiotic gets rid of an infection, or will it gradually dilute and fade away?  This is indeed the $ 1.1 billion question in the acquisition of Tumblr by Yahoo!

Solid business case or act of faith ?

If Yahoo! and Tumblr continue to operate and appear on the internet as totally distinct platforms, one fails to see what it is about Tumblr that will attract traffic to Yahoo!  It is hard to believe that the look and feel of Yahoo! would appeal to Tumblr users, and loading Tumblr with links to drive viewers to Yahoo! might cause frustration and irritation …  Tumblr is on the rise, Yahoo! is in decline, so it is quite clear which of the two is in urgent need of profound transformation.

“Coolness” is the outcome of a specific style, flair and contagious energy of the person or team at the helm of a business, which must percolate through the entire company.  What is it that makes a restaurant or bar “the” fashionable place to go to in a city?  There is no recipe for coolness and trendiness, and remaining on top of the “cool” wave requires an ability to constantly come up with something new as competitors are fast to copy whatever they believe consumers find so attractive.

There might be some transfer of knowledge and consumer insights from Tumblr to Yahoo! but $1.1bn is a high price to pay for that learning experience, if indeed it does occur.  For a start, it would not have cost much to redesign the Yahoo! interface as we all know that cluttered screens are a total turn-off for most audiences.  If that transformation does not occur fast, Yahoo! will be left with the continuing issue of declining audiences and the benefits case of the Tumblr acquisition will rest entirely on the ability to massively increasing income from advertising.  Whether Yahoo!’s current advertisers will want to associate their brands and services with some of the more politically controversial or sexually explicit content of the Tumblr platform remains to be seen.

Yahoo!’s track record in M&A is a mixed one; GeoCities which was acquired in 1999 was canned 10 years later.  A wave of further acquisitions in 2004-2005, notably that of Flickr, failed to infuse the “coolness” Yahoo! was seeking, but that was before the days of Marissa Mayer.  Yahoo!’s board and shareholders have made an act of faith in believing that Ms Mayer is the charismatic leader who will send a positive shockwave through the company, put the negativity of years of decline behind and turn Yahoo! into a stylish platform.  Let’s hope they are right.

This kind of act of faith feels similar to wearing a new prototype of mechanical wings whilst standing on the edge of a cliff.  And then you jump : Yahoooooooooooo !


Office Depot’s Chairman and CEO Neil Austrian can point an accusing finger to Thomson Reuters for prematurely releasing a bulletin announcing that his company was in advanced merger talks with OfficeMax, but the real issue is one of content rather than timing. Good preparation and excellent communication are so crucially important throughout the M&A process, from the initial declaration of intent until the end of the integration process : the recent Office Depot & OfficeMax incident might one day become a business school case study of how some companies can get it so wrong.

Let’s forget for a moment the fact that someone at Thomson Reuters pressed a button a little too soon; the merger announcement had been drafted and was only awaiting Office Depot’s green light to be released, so it would only have been a matter of a few days before the news was officially scheduled to go public. Consequently, it is difficult to understand why Office Depot’s first reaction was to promptly delete the on-line announcement posted on their investor relations website before confirming its content just a little later: does this feel thought through and very professional?

Some might argue that a little drama around the announcement may add to the prominence of the news on the financial markets, but the sad reality is that there was not much to get excited about. A quick read through the announcement reveals the very generic nature of its content : apart from the usual verbiage about this being a “merger of equals”, there is no sign of a clearly articulated “reason why” the combined business will do better than if Office Depot and OfficeMax were to continue their own separate ways.

Out of the eight key strategic benefits mentioned in the announcement to justify the merger, the only one which is directly attributable to the merger is the expected synergy of USD 400-600 million in operating and G&A costs which the combined entity hope to achieve by the end of 2016. There is no mention of what the likely integration and rationalization costs will be in the meantime.

Neil Austrian states that “combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors, and increase stockholder value”. How many people today still believe that “bigger” is necessarily “better”? In what way does the merger result in a more attractive partner to the vendors or offer new opportunities to the group’s employees (presumably excluding those made redundant as part of the cost synergies). Does it really take a merger to implement “best practices in sales, operations and management”, or will the post-merger integration effort be a huge distraction which will, to the contrary, hinder the roll-out of these much needed best practices?

Combining Office Depot and OfficeMax will provide the merged entity with approximately 2,000 outlets in the United States, slightly more than rival Staples’ 1,900, but as Christopher Matthews astutely remarks in TIME, “office supply superstores have been struggling to stave off competition from online retailers, while also dealing with the slow decline of paper products as offices become increasingly digitized”. In that context, one fails to understand how owning a greater number of outlets could possibly give the merged company a decisive competitive advantage.

A clearly articulated and irresistible business case is one of the fundamental prerequisites of any business transformation initiative, as anyone experienced in driving change in organizations will know. In the absence of such clarity, the post-merger integration of Office Depot and OfficeMax is most likely to abort.

Until the management of Office Depot and OfficeMax come up with some more compelling and credible arguments as to why they should merge, the market appears to have given the current merger proposal the verdict it deserves, with Office Depot’s shares dropping by more than 16% and OfficeMax by 7% whilst rival Staples enjoyed an upward blip. Clearly, some of the major shareholders cannot be very happy right now…

We learnt in last week’s announcement that “the parties have also agreed to form a selection committee made up of an equal number of independent Board members from each company that will oversee the search process for naming the CEO for the combined company”. Who knows : maybe this search process will unearth some remarkable candidates capable of creating value and growing Office Depot and OfficeMax in more innovative and effective ways than through the proposed ill-conceived merger.