As someone once said, that was the week that was. It depends how you count and how you value shares and the currencies in which they are quoted, but it seems fairly clear that corporate deals worth nearly 90bn were announced worldwide last week.
I noticed a marked uptick in the number of people talking about “globalisation” in fashionable London restaurants. As if that’s anything new. But a trend has to be given a label and the idea that corporations need “global reach” is a handy enough justification and is simple enough for everyone to understand.
I think life is both more complicated than that and open to more cynical interpretation. But first a quick waltz through those deals, pausing only momentarily for a value judgment on each.
BAT Industries announced the demerger of its financial services arm into the clutches of Switzerland’s Zurich Insurance, in a deal worth 23bn. The acquisition of Allied Dunbar and Eagle Star in the UK and Farmers in the US rockets Zurich ahead of Germany’s Allianz into pole position in the world insurance Grand Prix. So Zurich has truly global reach in retail financial services and doubtless will argue tremendous econ-omies of scale. Good luck to it – I suspect that the business of insurance risk is very hard to run on a worldwide basis and that it will learn some financially painful lessons.
As for BAT, the deal bails it out of its long-standing problems of inconsistency of focus and locked-in shareholder value. Not only has it released a great shard of that shareholder value through the Zurich deal, but it has also freed itself to return to its core business – British American Tobacco, bless its political incorrectness, will seek its fortune as a separately-listed global marketer of the weed.
The value of this exercise, in corporate terms, will be to demonstrate that for all the efforts of the health lobby, tobacco as an industry has not gone “ex-growth”, as it was expected to do. The progress of this company will be interesting to trace, now that it has just one central purpose and the investment potential to pursue it.
Anglo-Dutch publisher Reed Elsevier, meanwhile, announced a 20bn merger with Wolters Kluwer of Holland. Following the 1993 cross-border formation of Reed Elsevier, this latest deal would appear to suggest that, while there are cultural dangers in cross-border European deals, our compatibilities with our low-country publishing cousins are considerable. I don’t know why I find that faintly depressing.
But more importantly, the deal should provide a solution to the long-running saga of what to do with its IPC subsidiary, which has been burning a hole in Reed Elsevier’s pocket. It will be fascinating to see whether a rival consumer magazine publisher, such as Germany’s Bertelsmann, or its own management, come up with the 1bn or so that can be expected to be the price-tag. There are those on the inside who are long-overdue having their bluff called.
Bernaud Arnault, head of French luxury goods combine LVMH, suddenly saw the logic of the proposed 24bn merger of Guinness and Grand Metropolitan last week and co-incidentally accepted a payment of 550m to include GrandMet’s brands alongside his own in his distribution agreement with Guinness. I’ve said it before: no one should be surprised at the way Arnault has behaved – he is French and to be surprised by Gallic behaviour is to reveal ignorance of the culture. Watch out now for a 6bn demerger of Allied Domecq.
The star turn of the mergers and acquisitions week must have been that performed by US telephony conglomerate GTE, which waded into the battle for MCI with a 17.5bn cash offer, against WorldCom’s 20bn all-paper counterbid to BT’s cash-and-paper offer at 14bn. As this drama plays out, what it will teach us is not only how much paper is really worth at what practically everyone agrees is the top of the equities market, but just how street-wise BT is on the world stage as we discover whether it can work in cahoots with GTE for its own ends.
There were other deals that made up that fantastic total – T&N’s 1.5bn automotive engineering merger with US rival Federal Mogul, for instance – but they can wait for another day. What last week shows us more than anything is the hubris of the top of worldwide equity markets, which may have broken by the time this is read.
Partly this can be ascribed to muscular, male-dominated corporations pumping testosterone and absurdly highly rated stock. But only partly. More cynically, international advisers are playing the end-of-the-pier and the top-of-the-market game.
Much is often made of the dangers of cultural clashes in cross-border deals. Some of the most successful cross-border advisory businesses have been developed by the likes of Goldman Sachs and Merrill Lynch. Not that the Americans have this field to themselves – step forward SBC Warburg, ING Barings and the like in Europe. That’s where true globalisation lies.
Playing international merger games is invariably a happy experience for advisers – more often less so for the advised. It may not be over-cynical to suggest that the surest sign of a forthcoming correction in over-valued equity markets is the unedifying spectacle of advisers lining their pockets for tough times ahead.