Could mergers come back into fashion?

The wave of debt-fuelled mergers that helped propel the world into the current recession may not be dead and buried. The recent battle for Cadbury (with American giant Kraft attempting a takeover) could be a sign of things to come, according to The Economist. Executives and investment bankers are feeling much more confident this autumn: even if recovery is slow, the worst may be over for the economy. Crucially, it’s possible to borrow again. Share prices, though off their lows, look cheap by historic standards. These are ideal conditions for a new merger wave to form.

Worldwide there were only 15 hostile bids of $500m or more before 2002, but that number increased to a high of 81 in 2006, before plunging during the economic crisis. But this year there have already been 21 hostile bids.

One reason for this is technical: there has been a sharp reduction in the protections that managers can use to resist a hostile bid. The other is that low share prices make lots of firms look more attractive as targets than they have been for many years.

It remains to be seen whether this wave of hostile bids will turn out any better than those of the past. Many of them ended up in bankruptcy, although it’s often argued that their overall effect was to make the economy more efficient, as relatively unproductive firms were taken over and reorganised.

The article argues that one big positive difference this time is that hostile bids are more likely to be driven by a clear business strategy (such as Kraft’s attempt to buy Cadbury to plug its products into the Kraft distribution system) than by the ready availability of debt to “financial” buyers.

But merger mania still has a bad reputation: below is a reminder of the reason why, from a 2006 blog:

A report, conducted by the management consultancy Hay Group in 2006 (when deals worth about £966bn were concluded), tried to find why mergers so often fail to live up to their hype. Their key finding was that the ‘culture shock’ caused by bringing together two organisations is the biggest reason for failure. In other words, the marriage is between a couple who can’t or won’t get on. Apparently, the UK’s record was among the worst in Europe where the overall failure rate was 91%, as against 97% here.

The Hay Group report which analysed more than 200 major European mergers and acquisitions found that about 28% of business leaders who had been involved said that the deal had failed to create “significant new value”. The director of the Hay Group is quoted as saying:

“Companies should be examining the compatibility and differences between the two firms well before the deal is made public, in order to have a clear plan of action in place right from the start.”

But the survey also found that about 70% of senior management believe that it is too difficult to get information on a firm’s business culture, staff and organisational structures before they make a bid.

It added that after a deal is completed, only 13% of mangers put a high priority on engaging and integrating executives and the workforce as a whole. The report suggested this had a “disastrous impact” on the successful integration of firms with 78% of employees at a company being bought opposing the mergers. Many managers also said that the atmosphere at work after a merger was also unsatisfactory, with 22% of those asked talking of a ‘culture shock’ and 16% describing the situation as “trench warfare”.