A deceptive calm has temporarily enveloped the fractious GfK-TNS merger, which would see two of the world’s largest market research companies united.
Fractious? market research? Yes, it has to be admitted the idea is a bit oxymoronic. In fact this would probably have been a perfectly uneventful, innocuous business deal – quietly nodded through by shareholders, as its architects no doubt intended – but for one complicating factor: Sir Martin Sorrell’s hostile interest.
For Sorrell, chief executive of WPP, the fact that TNS, biggest of the independents, is in play offers a not-to-be missed opportunity to bolster his own market research interests, represented by Kantar. Thanks to WPP’s global footprint, Kantar’s operations are geographically well spread, particularly so in the growth markets of the Far East. According to Sorrell, Kantar would make a far better fit with TNS than GfK, whose geographical spread tends to mirror rather than complement that of TNS. That is to say, both are very strong in Western Europe, but relatively weak in the US and BRIC (Brazil, Russia, India and China) markets. The conclusion we are invited to draw is that a marriage of TNS and GfK might be convenient (not least for some of its top executives) but would inevitably be destined for a lower growth trajectory than if TNS linked up with someone else – Kantar, just for example.
Economies of scale?
Of course, it’s not that simple. Kantar, you could say, needs TNS rather more than TNS needs Kantar. Despite its global spread, Kantar is relatively underweight for a world player (number five by revenue). Sorrell is wedded to a strategy where half his revenues eventually come from what he calls “measurable businesses”, by which he means digital as well as research. At the moment, the figure is about one third. TNS would be a helpful fillip in this direction. By the same token, if critical mass is an important issue in the market research business – as TNS and GfK overtly claim, and Sorrell tacitly admits by virtue of his own involvement – then he cannot afford to look kindly upon an alternative alliance which implicitly jeopardises his own plans for global dominance in the market research business.
Either way, it is in his interest to be as obstructive as possible to the GfK-TNS deal going through. Something he has not lost any opportunity to be.
The tactic has been to pitch a sighting-shot cash and shares bid – offering a seemingly reasonable 35% premium to TNS’ pre-bid share price – while simultaneously engaging in a very public war of words with the senior management of both TNS and Nuremberg-based GfK.
Though Sorrell has recently sweetened his offer, most analysts and, more importantly, shareholders in TNS still feel it is underpowered. The propaganda war, on the other hand, has mostly gone Sorrell’s way, by exposing some potentially embarrassing weaknesses in the GfK-TNS defences. Sorrell has demonstrated his usual personal adroitness in dealing with the media, whereas TNS has shown an old-fashioned gentlemanly disinclination to get involved, preferring to deal at arm’s length with such matters through its PR agency, Brunswick.
A chink in the armour
This initially put the TNS/GfK axis at a disadvantage when parrying some of the seemingly reasonable criticisms that Sorrell brought to bear on their merger. It has to be remembered that the proposed deal only came to light in the first place because of a mysterious leak in a German newspaper. A certain amount of flat-footedness might be expected in such circumstances. As it happened, TNS managed to rush out a press release very quickly, outlining the broad bones of merger synergy. What it conspicuously failed to do, until about a week later, was to confirm the key cost savings (about £80m it turned out) which were likely to be the final clincher in winning shareholder approval.
Here was the chink in the armour, and Sorrell was quick to exploit it. Why, he asked, if GfK and TNS had, as they claimed, been mulling this deal for months had they not been more forthcoming about the cost synergies? The answer, he suggested, was that they meant to implement redundancies on a substantial scale in Germany, where GfK is based – and that spelt severe political embarrassment. Or, to use his own words:
“It is clear that if GfK/TNS are seeking to achieve synergies of €102m by year 3, Germany will figure prominently in these redundancies. GfK has approximately 25% of its revenues in Germany and TNS approximately 15%. Where will these “synergies” come from other than by substantial cost reductions in Germany?”
Full employment, the integrity of Germany’s mittelstand business community and loathing for the allegedly asset-stripping behaviour of Anglo-Saxon companies (remember the head of the Social Democratic Party’s outburst against “locusts”?) are all highly emotional topics liable to work German politicians and their electorate into a lather.
Sorrell will therefore be contemplating somewhat gleefully the mischief he has managed to stir up. With a bit of luck, he must be calculating, the GfK-TNS deal will implode under the weight of public criticism, leaving him to tidy up his counter offer and walk away with a bargain.
Certainly the snail’s pace with which TNS and GfK are moving towards producing their formal offer document suggests some painful rethinking is going on about just where those redundancies are going to fall.
But whether Sorrell has found the Achilles’ heel he is hoping for remains to be seen. He, like us, will be waiting for that document to emerge. Then, and it must be very soon, the war of words can resume in earnest.