Conventional wisdom has it that corporate deals – the mergers and acquisitions activity that keeps investment bankers in the manner to which they’re accustomed – have dried up in response to the global economic slowdown and the political uncertainties attached to an international war against terrorism.
There is evidence that the corporate juices which drive merger activity have all but evaporated. I read somewhere that the investment bank JP Morgan has calculated that only some 41 per cent of all European takeovers or mergers worth $1bn (£700m) or more announced this year have gone to completion. That compares with 84 per cent last year.
The effects on the intermediary markets have been clear. US investment bank Merrill Lynch last week offered 50,000 staff voluntary redundancy. It doesn’t want them all to go, of course, since that would be a close-down rather than a rationalisation, but estimates are that it would like to see its thundering herd culled by 10,000, or 15 per cent of its total workforce.
That’s in addition to the 6,000 or so that have departed in the past year. Merrill Lynch is far from alone in this. Bank staff everywhere are taking a hammering, as are other professional services such as advertising and financial public relations.
I can’t help thinking that these redundancy programmes are short-sighted. The prevailing expectation is that the world’s recession is likely to be sharp but short. There is a clear and present danger here that professional services companies will not begin to feel the benefit of their cost-cutting exercises until after the recovery has begun, at which stage they will want to be re-hiring again.
Part of the problem might be that investment banks and marketing agencies have no choice but to cut back, since they distribute such generous bonuses during the good times that they have little cushion
in reserve for paying basic packages when times are lean.
If that’s the case, frankly they deserve to be axing staff in the downturn and to be caught short on the upturn. It seems ludicrous that some of these companies presume to advise blue-chip clients on how to run their businesses, while operating their own houses on a knee-jerk boom-and-bust model.
But that’s a matter for them and their executives, who last year drew seven-figure bonuses and are this year out on their ears. More useful is to examine the conventional wisdom that there are no deals to be done in this economic climate.
I wrote recently that there is good value to be identified in deflated markets and that it is an absurd characteristic of corporate-deal activity that most takeovers and mergers occur at the top of the cycle (MW October 4). I see no reason to demur from that position as the first signs of deals begin to emerge in one of the most defensive sectors of the stock market – the food industry.
Foods are relatively recession-proof. We might put off indefinitely buying a new car or cancel the foreign holiday (and if the traffic jams to the West Country during half-term last week were anything to go by, such cancellations are rife), but we still need to feed our families.
So the likes of Tesco, Sainsbury’s, Safeway and Asda are doing relatively well, with annual sales growth of about six per cent, but nowhere to go in terms of quantum growth, other than by nicking market share from each other – not an easy task now that they are all under very good managements.
This makes shareholders in the food retailers restless. Where, they want to know, is the earnings growth of which these businesses should be capable likely to come from? The answer has to be from economies of scale offered by consolidation. How this industry might consolidate is in the hands of the more imaginative of these very good managements and the competition authorities. But there are those who believe that a five-year-old story may be reprised with Asda – owned by US colossus Wal-Mart – getting together with Safeway.
Safeway’s market capitalisation is of the order of £3.5bn at present and it is worth, in the current bargain-basement environment, going to £5bn for Asda to take it out respectably. That may be small fry to the likes of Wal-Mart, but it’s a big deal to the rest of us and one that should pay a few investment banking salaries for a quarter or two.
And it’s not just at the retail end of the foods market that opportunity knocks. The willingness of Nestlé, the world’s largest foods manufacturer, to exercise its option over HÃÂ¤agen-Dazs is a case in point. The deal would value the ice cream mega-brand at some £700m and put Nestlé in head-on competition in the US ice cream market with Unilever. Again, this is a big deal.
There may not be enough of such deals to go around or to keep the boom times going, but a little more selective creativity is required on the parts of the professional firms that service such deals. As matters stand, there are thriving defensive industries around, such as foods, demanding attention from professional services firms that seem too fat, lazy or stupid to do anything about it.
George Pitcher is a partner at communications management consultancy Luther Pendragon