Corporate egos reject logic to hasten mergers made in hell

Some ugly scenes in British boardrooms have led me to review my recent self-congratulation at having got some market trends right.

The ugliest scene is at SmithKline Beecham, which spurned American Home Products in favour of having Glaxo Wellcome as a mega-partner, only to decide that it couldn’t be done after all. And there are other failed mergers causing angst among directors and displeasure among institutional fund managers – Reed Elsevier’s abortive proposals for Dutch conglomerate Wolters Kluwer being among them.

Whatever next? Will Birmingham Midshires turn away from Royal Bank of Scotland to recommend Halifax’s more generous terms, only to be told that its a boring Midlands building society after all? Will Great Universal Stores decide that it doesn’t want Argos? Will Gazza decide to stay in Scottish football?

One of the first things to observe is that this isn’t some deep-seated economic trend or pre-millennial psychology. The proportion of failed deals has largely remained constant over the past decade. According to research outfit Securities Data, the number of broken billion dollar deals has remained within the eight to 12 per cent range.

Some work and some don’t. It’s as simple as that.

That might be a little trite. Some suggest that the international regulatory environment is at last catching up with globetrotting shareholders. Reed Elsevier and Wolters blame Brussels bureaucrats for the failure of their negotiations, as do accountants KPMG and Ernst & Young in the unquoted professional services field. US anti-trust authorities may yet do for any over-reaching efforts in the telecoms markets and, in defence industries, may certainly shoot down Lockheed’s takeover of Northrop.

But it is human instinct to search out scapegoats. Managements are only human (with the possible exception of the financial services market). And regulators are an all too easy target for blame. They, too, are only human (again, with the exception of the financial services ones).

The bald truism is that there is probably no such thing as a merger, especially between corporate giants. Show me one and I’ll show you an attempted acquisition. This, it would seem, is especially true of the SmithKline/Glaxo play. We are not so much witnessing the clash of the Titans as the clash of the egos. It was never a merger of equals.

The unedifying spectacle of managements playing musical chairs, leaping for their boardroom seats as soon as the wedding music stops and endeavouring to leave their former playmates exposed and out of the game, has already begun.

SmithKline’s tennis-pro chief executive Jan Leschly is remarkably – some might say intriguingly – less in the spotlight in this regard than his chairman Sir Peter Walters and his opposite number at Glaxo, Sir Richard Sykes. City observers say of Walters’ record that to be embroiled in such a corporate mess once may be deemed unfortunate, twice carelessness, while anything beyond that could look culpable.

The whispering campaigners make much play of a CV that features a chairman of Midland Bank which got taken over by HSBC; a chairman of BP during the period that straddled the debacle of Bob Horton as chief executive; and a board position at Saatchi & Saatchi during a period that caused the eponymous brothers to leave. To that, you could add deputy chairman of EMI, where many a nettle has yet to be grasped.

It is, as I say, remarkable that these observations should be emerging in the wake of the collapsed deal. We saw barely hide nor hair of Walters ahead of the proposed merger.

As I recall, at that time the attention was firmly focused on Leschly, his extraordinary career and his pan-galactic corporate ambitions.

It is hard to say in what quarters that attention was encouraged. Less hard to develop is the view that such bids are driven by at least as much human vanity as industrial logic. If you doubt that, just ask yourself why a deal that had such apparently compelling logic on January 30 was abandoned just three weeks later.

On one level, the answer is quite refreshing. Great corporations are not run by faceless automotons, rather people with ambitions and human desires. In a “fat-cat” envy culture, it is worth remembering that tycoons such as Lord Hanson and Tiny Rowland historically served their shareholders well, whatever has happened to their corporate interests recently.

It is worth institutional fund managers, who are whingeing that 13bn of “shareholder value” has been lost in the collapsed SmithKline/Glaxo deal, bearing this in mind. I don’t agree with those who say that fund managers should shut up because “they’ve never run anything in their lives”. They run the livelihoods of what we emotively call widows and orphans – a rather more arduous burden than most industry carries.

But I do believe that these fund managers depend on industrial managers getting it right. And they get it right for the same selfish, human reasons that they get it wrong. Industry doesn’t expect an easy ride from shareholders, but I don’t think it should expect witch-hunts either.


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