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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 …

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.

Corn flakes, or honey and pistachio puff pastries?

After years of turmoil and instability in North Africa and the Middle East since the “Arab Spring”, the region is beginning to be seen my major western investors as again offering good long term potential, or at least worth taking a risk.  The fact that Coca-Cola is building a major bottling facility in Gaza is quite symptomatic of this new perception.

One Bowl of Corn Flakes on a White BackgroundIn late August, the world’s largest breakfast cereal producer Kellogg Co expressed its interest in acquiring all or at least a controlling stake in Egypt’s Bisco Misr, the country’s reputed manufacturer of confectionary, cakes and biscuits.

Within the vast geography that runs along north Africa to the Middle East, Egypt is evidently the focus of attention because its population of close to 90 million offers a huge market potential to providers of inexpensive everyday consumer goods.  Just the right thing for the likes of Kellogg’s breakfast cereals, and taking control of an Egyptian household name such as Bisco Misr therefore makes eminent sense.

However, being the world’s Nr 1 in an important consumer product segment and enjoying over 100 years of company history does not guarantee victory when it comes to seeking further expansion.  Abraaj Asset Management, the middle eastern private equity company founded in 2002 in Dubai now growing towards global presence with hubs in Istanbul, Mexico City, Mumbai, Nairobi and Singapore, is ideally placed to understand the needs and potential of their nearby rapidly developing economies. No sooner had Kellogg revealed their intentions regarding Bisco Misr, that Abraaj jumped into the game and has since kept beating each of Kellogg’s bids.

Bids for Egyptian Bisco Misr reach pharaonic heights

The regulators have set a deadline of 11th January 2015 for the bidding process to reach a conclusion; until then, the world will watch the Middle East’s largest private equity firm fight the world’s leading cereal manufacturer to see who will control what Egyptian consumers enjoy on their table for breakfast.

At the time of writing this article, the two bidders have already made four offers and there will be more as the deadline approaches.  So far, the price both bidders are prepared to pay for BIsco Misr has risen by over 20% since their first bid.


East is east – will the outcome confirm Rudyard Kipling’s vision?

This struggle between one of the western world’s giant household names and a middle eastern powerhouse is interesting in that it may reveal a lot about the region’s sentiment.  Commentators believe that a victory by Kellogg would improve western companies’ confidence and attract further western investment in the region.  On the other hand, Abraaj are committing to maintaining Bisco Misr’s Egyptian identity and its Egyptian management.  Much is written in the numerous articles recently published on this bidding battle about the west’s growing confidence towards the middle east, but not much is said about the other perspective, namely how populations in the Arab world might view the west after the uprising of the Arab spring some years ago.

For many, the west will be remembered for poking the fire and giving the population of many Arab nations the confidence of turning discontent into the outright uprising that spread like wild fire, which the west dubbed “The Arab Spring”.  Spring is the season of new life, a season of clement weather after harsh winters, the flourishing of Nature with the promise of rich crops and prosperity. Instead, having praised the courage and determination expressed in the uprising that toppled governments across the region, many people will feel that the west did not have much to offer as a substitute nor much support to evolve towards renewed stability and governance, propelling many of those countries towards a wide vacuum which has left the door open to the sprouting of every form of extremism.

The relevance of this historic background is that BIsco Misr might actually have a higher value if acquired by Abraaj Asset Management rather than by Kellogg, because there is a risk that some consumers may resent the sale of one of their much loved national brands to an American giant.  Food brands have this in particular that they can achieve the status of a national icon and consumers will then react very emotionally when such brands risk losing that national identity.  British consumers reacted strongly when their treasured Rowntree confectionary company was gobbled up by Swiss multinational Nestlé in 1988. Further highlighting the link between food brands and national identity, the Swiss didn’t react much in 1970 when Tobler, makers of the world famous Toblerone triangular chocolate bars, merged with Suchard, another Swiss company renowned for its chocolates as well as its iconic Sugus fruit candy; however those same Swiss consumers went ballistic twelve years later when Suchard-Tobler was acquired by Germany coffee giant Jacobs and the production of the treasured Sugus candy relocated abroad.

If a similar phenomenon can be expected in Egypt, Abraaj may be able to raise its bid for Bisco Misr beyond the level at which this acquisition could offer the Kellogg company any prospect of a profitable investment.  Clearly, an acquisition by Kellogg would provide Bisco Misr with access to considerable know-how and technology that would contribute to the company’s future development, but the next two weeks will tell us whether this can outweigh feelings of national pride and identity.

Whatever the outcome of the Kellogg Abraaj match, this take-over will set a precedent, either as an open invitation to other western companies to invest in Egypt, or to the contrary as a deterrent:  a polite sign that there is still much to do to rebuild trust towards the west in that part of the world.

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…

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.


A month of intense courtship ends in rejection

When Pfizer, the inventor of Viagra, announced on 28th April its interest in acquiring AstraZeneca,  the latter’s shares jumped by more than 14% and kept investors on the edge of their seats during a whole month as they watched the bid rise higher and higher, but not enough for AstraZeneca’s leadership to surrender to such courting.

Whereas AstraZeneca’s shares were worth £37.81 in mid-April, Pfizer’s £55.00 final offer was still deemed not attractive enough, and one may wonder what makes AstraZeneca’s boss Pascal Soriot so confident that his company is worth more than the 45% premium Pfizer was prepared to pay.  Now, it’s “game over”, this dramatic game of poker saw AstraZeneca’s shares climb to £43.28, and they have continued to hover within the £42.50 to £43.00 space since rejecting the Pfizer offer. 

So is this a realisation by investors that AstraZeneca is worth more than the market had rated until a month ago or, as would appear far more likely,  could this just be the consequence of Chairman Leif Johansson’s admission, after Pfizer had declared their £55.00 bid to be “final”, that a £58.85 bid might be considered?

Growth projections or bluff?

Worldwide, the levels of investment and effort in bioscience have reached dizzy heights, and major breakthroughs are expected that will revolutionise the treatment of cancer, diabetes, Alzheimer’s and other threatening illnesses.  In this race to find the Holy Grail, whoever is first in commercialising these revolutionary drugs wins the prize.  AstraZeneca have argued strongly that they are on the verge of releasing that breakthrough, particularly in the area of cancer treatments, but competitors such as Novartis, Merck or Roche are also in that race and it will be tough.

The dramatic escalation of Pfizer’s bids and AstraZeneca rebuffs has now placed self-inflicted pressure on the latter’s management; substantiating its self-assessed value assumes that AstraZeneca’s revenues will grow by 75% over the next eight years.  This will require not just one but several breakthrough drugs and those hopes could be dashed if competitors come up with similar drugs within that same timeframe.

Call in the politicians for some emotional debate

In retrospect, it is also possible that Pfizer may have chosen a bad time to launch its bid. Beyond the mere question of money (which in itself was not negligible as AstraZeneca proudly declined the industry’s largest ever deal), much of the debate will have focused on the future of bioscience and Britain’s role as a worldwide centre of excellence in that field.

Having that debate whilst European parliament and local elections in Britain were taking place gave politicians from every party a golden opportunity to voice their thoughts, each of them pledging to be defending the national interest.  This will have almost certainly boosted AstraZeneca’s confidence in its pursuit of continued independence.

Wait three months, or seek a less demanding bride?

Now that the courting has failed, British law requires a minimum three month wait before Pfizer is allowed to attempt luring AstraZeneca again.  How big will the diamond ring need to be this time?

Whereas many analysts are skeptical about AstraZeneca’s ability to achieve anything close to the very ambitious goals it has set itself to justify the high premium over its current share price, Pfizer’s offer of £ 55.00 assumes that such a bold plan could indeed be achieved, but then one should wonder how Pfizer could hope to generate even more value beyond that point to derive any benefit from this massive acquisition.

Once the current excitement and frustration have cooled off, Pfizer might be glad they have not over-stretched themselves in acquiring a major competitor at its maximum price.  If mergers and acquisitions are about creating value rather than just becoming the biggest guy in one’s industry, I think there could be some benefit in seeking out smaller pharmaceutical companies whose product pipeline could complement Pfizer’s declining R&D productivity and which could benefit from Pfizer’s scale and commercial presence: that would constitute a real win-win.

She loves me, she loves me not …

Several of AstraZeneca’s significant shareholders would have been happy to take the money and run when Pfizer offered them £ 55.00, cashing in today instead of waiting for value which is being promised to them in the future based on a very uncertain plan.  But human nature is such that no one can face the embarrassment of a U-turn, coming back on a “final offer” or saying “oh why not” after having said “no”.

Many analyst still expect Pfizer to come back to the negotiating table in some months from now. However if that does not occur, some powerful and very frustrated shareholders will be holding Pascal  Soriot to ransom in delivering his ambitious plans and revealing those miracle drugs we are being promised.  There could be difficult times ahead.

… in the meantime, the elections are over and bioscience has abruptly fallen off the radar screen of the politicians who only two weeks earlier were desperately arguing in favour or against the Pfizer deal in typical cacophony.  Maybe the three month cool-off period will do them some good too.

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.

IBM Servers and now Motorola Mobility : China’s two biggest technology deals in the space of two weeks

Whilst the jury of bloggers is still out debating whether Google’s sale of Motorola Mobility to Lenovo for just under $ 3bn is a smart move or the admission of a terrible flop less than two years after buying that company for $ 12.5bn, Lenovo’s double acquisition clearly signals an aggressive growth strategy, and yesterday’s move is intended to propel the company to become one of the leading global players in mobile technology.

Two consecutive acquisitions of this magnitude by one same Chinese giant are likely to have a non negligible impact on the American psyche.  The regulators will be having an interesting time sifting through the pros and cons before allowing Lenovo to walk off with their new prized possessions, although it is difficult to see on what grounds these two deals could be blocked.

Good Feng Shui Will Be Needed to Repeat the ThinkPad® Magic

Last week’s acquisition by Lenovo of IBM’s low end server business made obvious sense, in the footsteps of the very positive development of the ThinkPad® range since acquiring it on from IBM in 2005.  However, Motorola might be a different case, because the brand’s eroded equity had only recently been revived by Google after years of decline, and this was achieved by reinforcing the brand’s American identity and heritage, which had a very positive impact on Motorola’s market share in North and South America but did little for the brand’s performance elsewhere.

Manufacturing mobile sets in Texas might strike the right chord for American consumers, but poses a challenge in terms of production costs when the competitors’ operations moved to China or other low cost countries years ago… In that context, it is hardly surprising that Motorola’s losses were worsening year-on-year.

Lenovo will certainly leverage their manufacturing capability to generate significant cost synergies, but the determining factor for success once the issue of manufacturing costs has been addressed will be one of sales volume rather than margin per unit: will Motorola maintain its image in North America under Lenovo’s ownership and have the talent required to develop products capable of leading the category in terms of design and features?  The payback on Lenovo’s investment to shoehorn itself into the Americas’ large and lucrative mobile market assumes that the magic that occurred with the ThinkPad® can be repeated with the Motorola brand.  Let’s watch this pace during the next two or three years…

The Simplistic View

Some indiscriminate commentators are comparing in a rather crude way the $12.5bn paid by Google in May 2012, its largest ever acquisition, with the $2.9bn “bargain price” at which Motorola Mobility is now being sold to Lenovo.  This totally overlooks the fact that Google’s interest in Motorola was based on the many thousands of valuable patents owned by that company, the most important of which Google will retain, whereas Lenovo needs the equity of a strong brand to break into the American market.  Of course, we shall need a few years to determine with certainty whether this was a win-win deal, but it clearly has the potential to be one.

Considering the magnitude of Motorola’s losses, which add to the cost Google paid for that company in 2012, many will argue that the price paid for Motorola’s patents was too high.  But if we look at this from the other angle, what would have happened if Google had failed to acquire the patents they needed to ring-fence their Android platform which was being increasingly challenged in the courts?

Google Not So Dumb After All

I cannot be the only one to believe that these patents have a far greater strategic value in terms of securing Google’s future than they would have if they were sold and dispersed across other players on the market: a 50% rise in the share price over the past 10 months shows that in spite of the proliferation of comments and blogs ranting about Google’s senior management being out of touch with reality, there nonetheless seems to be a general consensus within the serious investment community that Google know their stuff and continue to be incredibly successful.  A corporation the size of Google is bound to suffer glitches here and there, or even a big knock on the chin; what really matters is that they are strong and resilient enough to overcome those challenges and continue their formidable progression.

Google ended 2013 with revenue up 22% on the previous year’s figure and could afford to acquire Nest Labs inc. for $3.2bn in cash two weeks ago, partly financed by shedding off Motorola Mobility.

By retaining the key patents in the Motorola deal and jettisoning the loss-making hardware side of the business which Lenovo has the scale to possibly turn around, Google is no longer a competitor to other manufacturers whose devices use Android, and can therefore focus on developing the broadest possible usage of its Android software.  Not such a bad idea for a company which has built its reputation and fortune on developing remarkable software …