The recent rash of global acquisitions has led to an unusual combination of euphoria and fear. It is the shareholders of Tata Steel, Hindalco and Suzlon who are largely responsible for the latter emotion, and who have rushed to sell their shares in these companies.
Don’t they get it? It is a common refrain these days that these recalcitrant investors have unnecessarily panicked, and that they are unable to see the long-term benefits of such global purchases. Is that a fair comment on their competence as investors?
Large corporate acquisitions tend to be messy affairs. There has been a stream of academic research in recent years, showing that there is roughly a 50-50 chance that the shares of an acquiring company will not outperform the benchmark equity index in the years following a merger or an acquisition. Or, in other words, half of M&A deals do not create shareholder value. Then there have been the outliers—huge mergers and acquisitions that started with a bang and ended with a whimper. One is now in the news.
Those who scoff at the naysayers would do well to keep a close watch on what is happening at troubled auto giant DaimlerChrysler. In 1998, the US auto company, Chrysler Corporation, entered into a $36 billion “merger of equals” with its German peer, Daimler-Benz. The fit seemed perfect. The two companies had different products and were robust in different parts of the globe. So, there was no need for major corporate surgery—no worker layoffs or factory closures or hacking away at dealer networks. The two companies were supposed to complement one another.
A lot of things have gone terribly wrong since then, and the buzz now is that the Chrysler part of the merged entity could be sold to General Motors. The reason why the marriage could dissolve into divorce is that Chrysler has not delivered on its pre-nuptial promises. Its losses have mounted and its market share has slipped.
Analysts say this was not only because of incompetence. Chrysler has strengths in petrol-guzzling utility vehicles, whose sales have slumped after the rise in oil prices. The sharp rise in global steel prices has done a lot of damage as well. The long and short of it is that here is a global merger that has just not lived up to its initial promise.
There are many other well-known examples of failed corporate marriages. There is the deal between Sony and Columbia Pictures, between Time Warner and America Online (AOL), HP and Compaq. They have left a sorry trail of wasted cash and burned careers in their wake. Even the big-bang purchase of IBM’s personal computer business by Chinese computer manufacturer Lenovo—which, too, was greeted with nationalist chest-thumping in China—has run into a few unexpected problems.
There is a similar story to be told in another high-profile Asian deal: BenQ’s purchase of the mobile handset manufacturing facilities of Siemens in Germany. Of course, there are a number of examples of the other side as well. Not every large corporate merger ends in tears. Nissan and Renault came together in 1999, just a year after the creation of DaimlerChrysler, and both have benefited from working in tandem. (Renault bought a stake in Nissan, and not the whole company.) Closer home, Tata Tea did pull off its leveraged buy-out of Tetley in the year 2000, and made it a success.
The point here is not to compare failures and successes, as that could be an endless game. The more significant issue is to recognize that there can be failures—and big failures at times. The plain fact is that mergers and acquisitions often don’t work out as originally envisaged.
A large cross-border deal is fraught with risk. Many of our huge domestic deals, too, for that matter. Part of the risks are immediate. Can costs be cut? Can the borrowings used to finance the acquisition be paid back comfortably? Can the work cultures of two companies be aligned? And then there are the long-term imponderables, especially whether the market for steel, aluminium, cars, or whatever, actually develops along the lines envisaged when the acquisition was planned.
There is no doubt that the company managements that decide on these deals have done the numbers and weighed the risks. Shareholders, too, have a right to do the same. For, there is little doubt that corporate risks do increase when one company buys another. So, let’s not scoff at their fears. The road to corporate hell can be paved with good intentions.
Are shareholders justified in their response in the market to recent M&A deals? Do write to us at email@example.com