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Tag Archives: Regulatory approval

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 …

On course for becoming the world’s number one

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

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

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

Biggest hurdle removed

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

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

Just when everything is looking fine, someone spoils the game

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

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

Some players have won before the lottery is drawn …

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

… for others, the work has only just begun

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

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

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

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


Consumers’ interests acknowledged

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


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

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

Shaking hands over a deal that shall not be

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

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

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

Greater clarity regarding the merging of major airline operators

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

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

Back to the drawing board

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

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

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

Told you so …

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

Visualising the end game

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

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

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

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

Preparation, preparation, preparation

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

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

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

Maintaining focus

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

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

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


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.

Two ways of looking at the same thing

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


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

Market dominance: the helicopter view vs. the microscope

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

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

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

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

Supplier vs. customer power

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

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

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

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

Konichiwa ?  Ugh, not that well actually!

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

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

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

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

And the end result is …

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

Consolidation is the almost inevitable evolution of a maturing industry.

Attempting a second policy U-turn in less than a decade – have we gone full circle?

In the country which was the first to liberalise its airline industry some 30 years ago, the U.S. Department of Justice marked this month what could be a 180° change in policy by challenging the proposed merger of US Airways and its ailing rival American Airlines.  If this is really a U-turn, it only sets us back to the situation that prevailed at the end of the 20th century when the proposed acquisition of US Airways by United Airlines was fiercely opposed.

The first U-turn actually occurred in 2006,  after years of systematically opposing airline mergers, when the regulators allowed Continental to merge with United Airlines, Northwest to join forces with Delta Airlines, and US Airways to merge with American West, to name just the most important transactions that gradually crystallized the consolidation of the airline industry in North America and inspired European airlines to attempt the same.

Disruption : The emergence of a new business model

Until the 1970s, air travel was smart, prestigious, expensive and regarded as a privilege enjoyed by the appropriately named “jet set”.  But things were about to change.  The liberalisation allowed new players to emerge with a very different business model, cutting the frills that provided passengers with no real additional value, such as glitzy sales offices on Park Avenue, London’s Regent Street or the Champs-Elysées.  Low-cost airlines were born, flying their aircraft at close to full capacity and making air travel affordable rather than exclusive.

Next came the smarter strategy of variable pricing, adjusting the offering to the demand at a micro-level and thereby yielding a far better income by selling last available seats at a far higher cost than the first cheap ones on any flight.  At first the major established airlines looked down upon those “cheap” nasty would-be competitors and attempted to resist the trend towards flexible pricing. Today, flexible pricing is the norm in air travel, even for business or first class seats. The rest is history.

It only took ten years after deregulation for the airline industry in the USA to become chronically loss-making, as most efforts to adapt to the new market reality were unfortunately off-set by various political crises and downturns in the world economy. Some of us may still have fond memories of Pan-Am, TWA and Eastern Airlines – absolute monoliths in their own time, but all three are gone now, having vanished faster than the dinosaurs did when our planet was hit by a giant meteorite.

The Regulators’ schizophrenic reaction

Faced with the emergence of these new lean competitors, established airlines had two choices : emulate these new players through ruthless cost cutting and the removal of all “frills” in the service provided to customers  – which could end up damaging the company’s brand image and is difficult to implement in a highly unionized environment –  or aim for a quantum leap in scale to share the cost of the infrastructure required to run a full service airline, by acquiring or merging with other airlines.

The regulators’ first reaction was to oppose all industry consolidation attempts, feeling that these would reduce the number of direct flight routes which consumers enjoy, thereby forcing them to transit though hubs, and that the cost of air travel would rise sharply as soon as the competitive pressure is alleviated.

It took the financial collapse of some of the major airlines for the regulators to realize that full service airlines had no choice other than to transform their cost structure.  This prompted the first U-turn, in 2006, which opened the door to frantic M&A activity in the airline industry in North America as well as on the other side of the Atlantic, with Air France and KLM joining forces, British Airways swallowing up British Midland in spite of Virgin Airlines’ vehement protest, and the IAG group declaring its intention to make a series of significant further acquisitions once the British Airways and Iberia merger has been fully digested.

Panic reaction  – or strategic U-Turn ?

A merger between US Airways and American Airlines would create the world’s largest airline, and one can understand why the US Department of Justice filed a civil suit against that merger on 13th August.  Nevertheless, American Airlines has been under Chapter 11 bankruptcy protection ever since November 2011, so either some form of merger will take place as US Airways and American Airlines have vowed to defend their case, or American Airlines will be torn apart and absorbed in bite-size chunks by the rest of the industry.

Either way, this will represent a significant step towards the consolidation of the airline industry.

The recent reaction of the U.S. Department of Justice was probably more of a knee-jerk than the manifestation of a strategic re-think which would mark a real U-Turn.  That Department, together with six state attorneys general, and the District of Columbia, may just have voiced the politically correct antitrust concerns which a merger of this magnitude deserves …

IAG will be observing the situation with interest.  If the US Airways – American Airlines merger goes ahead, nobody will be able to oppose the series of acquisitions AIG envisage carrying out in the years to come.  And if American Airlines are left to disintegrate, there will be interesting pieces for IAG to choose from.

Let’s watch this space.  In the meantime, sit back, relax and enjoy your flight !