Buying, but for the Big Boys

The topic of Mergers and Acquisitions (M&A) is probably one of my favourite subject areas in business. I think it is because it would be so exciting to spend millions of pounds on another company then have the challenge of trying to integrate them to create the synergies and culture you have promised the shareholders (that might be crazy to hear I want to face the challenges). I remember in my GCSE and A-Level studies learning about some notable M&As:

Creating wealth for shareholders through M&A activity must be really difficult, you can do all the due diligence in the world and look at all financial indicators, but areas such as culture and employee motivation (which you can not physically see) may be your downfall which would be really unfortunate. Research conducted as far back as the 80's such as by Jensen and Ruback (1983) show that the target firms gains more than the bidding firm. I would be angry if my management based on hubris, their own self-preservation and hunger to build an empire would enter into a merger and then I wasn't gaining as much as someone who probably was not bothered.


One thing I remember from my business teacher at school was, she always stressed about culture, culture, culture (dare I go on?) was the single most important factor that could lead to the failure of M&A activity. In a sense I believe that, because you can not physically see the culture, but the financials are the starting point. My last blog (Blog 5) focused on culture which you can take a look at if you get time.


What I find really exciting (well exciting in my head) in this topic is the defence tactics that target firms can put down to stop firms bidding on them (the names are strange too). These poison pills in my head feel like they would be a little petty war like we would play at school such as flicking elastic bands at each other. How fun these poison pills may be, they can cause significant damage if a bidder does not spot them. Say a target decides to make a 'scorched earth' policy; load the firm up with debt, sell key assets to disrupt efficiency; if the bidder still goes for them they will ruin their shareholders value. I have learnt many poison pills; Pac Man Defence (who even makes up these names?), Greenmail, White Knight.


It is quite pertinent that today's blog is on M&A activity when there are two big ones in the news; Deutsche Boerse - London Stock Exchange and Three - O2 . From learning the material in this module and reading publications such as the FT, BBC to try and get all sides of the argument, I have seen that there are good and bad points for myself as a consumer and a member of the EU economy.


Firstly, the good. The Deutsche Boerse and LSE 'merger of equals' I believe will help the economy by providing better opportunities for European Companies to gain capital as well as companies from the US and Asia as London, Germany and Spain merged could help compete. However, how will the UK's EU referendum affect the benefits of this merger? I am undecided, but will continue to look.


Secondly, the bad. Three (CK Hutchinson) are looking to merge with O2, basically making the UK market for Telecom shrink to Three, EE and Vodafone (creating an oligopoly situation). Three want to pay £10.5bn for the merger (that is an exciting amount as I said before). How will it affect myself and you the consumer? Well, I think it really could, shrinking the market may lead to increased prices for the same service. When I go to look for new contracts, I currently think that there a lack of differentiation, so this will surely decrease more? Surely if they are creating better cost synergies they will reduce the prices (well this is what should happen), but I really do not think they will.


I never understood how a company would pay for the acquisition either (transfer through the banks Iphone app? Set up monthly instalments? Pay in 10p's?). But let me get serious, so the company will either pay using cash or shares. If I was a shareholder, I think I would the company to pay through cash as I would have to same amount of control and my shares won't be diluted. But if I was the target firms shareholder, cash may mean I pay a hefty sum of tax if I own a lot. Tough choice right?


As there will always be hungry managers, there will always be M&A activity in the market. Whether these are successes or failures will depend on how much research the company has done and whether they can integrate cultures. As consumers we will always be put as risk through M&As that we could be forced to pay more for the same service through lack of choice, however, we can only hope such mechanisms such as the Takeover Panel and Competition and Market Authority (CMA) regulators will help protect us.


Inside Job - A Culture of Dysfunction

This weeks blog will focus on my learning from the documentary 'Inside Job' by Charles Ferguson. What I like to do when watching something like this is identify a key theme of the documentary and then that is what I will talk about. The theme from this show was Culture.

The documentary went into detail about the dysfunctional behaviours of Wall Street and the Investment Banks in the US which led to the financial crisis (yes, again you have to hear about the crisis, sorry). These Wall Street bankers were selling sub-prime collateralised debt obligations (CDOs) to other institutions for their bonuses. This led to the collapse of Lehman Brothers and the need for Morgan Stanley to need bailing out.

What was really clear to see were people making terrible decisions and going for risky projects so that they could get their next bonus. This can be seen even after the financial crisis. For example, in 2012 RBS made a loss of £5bn and Lloyds a loss of £570m, but they both paid their top management bonuses of £607m and £375m. I just think that is absolutely ridiculous, how can you pay people bonuses for the losses they were making. Bloomberg made a nice quote that said that bonuses pre-2008 were incentivised for 'greed and risk'.

The second thing that was apparent was familiarity. You may ask why familiarity was a route cause of dysfunctional behaviour, but I think it is apparent. Familiarity between the CEO and Board, Leader of Country and Advisers or Investment Bank and Rating Agency (S&P, M, F) will create behaviours that will lead to bad decisions being made. I am currently doing a dissertation on audit quality and new regulation and I have found in my results that familiarity is one thing that reduces audit quality and this was another cause of the 2008 crisis. I don't think you can do a good job if you are supposed to be independent but also 'good mates' with the person who owns the company.

I am going to be an auditor after university (so exciting I know), so I have to be independent, I am sure subconsciously my opinions would change if my best friend owned to company rather than someone I did not know, I would place more 'trust' in what he said or did than a stranger. But it was clear to see in the documentary that people were not independent and making an ex-Goldman Sachs CEO Secretary of the Treasury helped benefit Goldman Sachs by $14bn in the bailout (yeah so independent right?).

Culture

Culture is so important in any firm, and is usually more of a reason why it is successful or a failure than any other in my opinion. Take Morgan Stanley for example, they had around 50,000 employees but a culture which was only looking for achievement of their next bonus which made them act so dysfunctional they were having cocaine and going to strip clubs every night.

Culture is important if you are wanting to undertake a merger or acquisition too. If I was a CEO and we found out that all the employees were really unproductive or taking high risks, this could cost us a lot of money and make the acquisition fail. But I think that it is so hard to actually think of how to measure the culture in a company unless you are there.

As a student and not having a full-time job before, I got the opportunity to undertake a placement. I could have tried to apply to a Big 4 accounting firm, but instead chose to go for Grant Thornton (who are number 5). The reason I did this was because I got told their 'culture' was a lot better (thank god is was a really great culture). But if the company has a horrible culture then I would have not succeeded in what I wanted there, and that would be the same with an acquisition.

Failures can be seen through recent history where companies have acquired others and have failed or had problems due to culture clashes:

• AOL - Time Warner
• Daimler - Chrysler

I think that a business leader in the organisation needs to set the tone for organisational culture. I believe this will help increase shareholder value by not putting it at risk, which would also be the case for a successful merger/acquisition as successful culture integration is said to be the most important factor for M&A success.


I just want to touch lastly as what my optimal culture I believe would be for a firm. I think a firm where you are recognised for things you do well, even a simple 'thank you' I found helped motivate me. Secondly, I think openness when explaining what I have done wrong, I hate when someone says 'oh, [this guy] said he didn't like you doing this', why didn't he just tell me? What is your optimal culture?