Why global reach is crucial to success of corporate mergers

The proposed NatWest/L&G merger may enable the new company to cover all UK bases, but it lacks global opportunities, says George Pitcher.

My comments last week that, the economy being in surprisingly good shape, we could anticipate a great deal of corporate consolidation as soon as the holiday season drew to a close proved to be unnervingly timely.

We have already witnessed the reassuringly colossal proposed mergers of NatWest Bank with Legal & General and French retailer Carrefour with Promodès.

I probably didn’t make enough of the observation that one man’s evidence of a prosperous economy is another’s proof that the top of the equities market has been reached, with major players wishing to deploy their highly-rated paper while they still have it.

But that caveat is as nothing to the issues that these two deals throw up, both separately and in their implications for each other in terms of global retailing. The management of these issues will be far more critical than matters of mere valuation.

NatWest has been rumoured to be on the brink of a deal with anyone from Prudential to Halifax since Bobby Robson was a lad. Or so it has seemed. That it would do a deal with one of the majors in the insurance and mortgage markets had become almost too boring to observe. Like troublesome progeny that hang around the house well into their 20s, one was hoping that it would find someone – anyone – who was willing to take it on.

No one could accuse it, then, of rushing into a relationship with L&G and now that it has found a partner the relief is palpable. In the event of the marriage being called off, I expect the figures to be arranged and rearranged so long-suffering shareholders will not be forced to wait again for NatWest to decide what it wants to do in life. In this climate, it may be considered almost ungrateful to ask whether the match is a good one. It’s like asking whether English football can really be called good just because we trounce Luxembourg. We’re just meant to be grateful for some good news at last.

But NatWest appears to have little synergy with L&G, which specialises in index-tracker funds, with-profits life policies and markets its products through independent financial advisers. By contrast, NatWest’s Gartmore is an active (rather than passive) fund manager, operates unit-linked life policies and sells through its branch network.

Before anybody says there must be synergies because the companies don’t duplicate services, let me remind them that this is the financial services market we’re talking about, not separate markets that might offer added value together. This is less of a conglomeration of shared markets than an attempt to have all bets covered.

NatWest and L&G may not know which way the market is going, but that doesn’t matter because their marketing covers every eventuality. In cost control terms, that’s like betting on every horse to be sure of winning.

The deal might make more sense if it brought extended global reach. That is presumably, in significant part, what the Carre-four/Promodès deal is about. They are colossal French retailers, but on a world stage they can really strut their stuff together. The combined company will operate in 26 countries.

According to US-based consultancy Management Ventures, the top 25 retailers will control 40 per cent of global retail spending over the next decade, with an average annual turnover of about £87bn – a level that the world’s current largest retailer, Wal-Mart has only just reached.

This increasingly will mean that buying market share forms only one, fairly prosaic, part of the story. The biggest winners among international retailers will be those which extend their global reach into the hottest new markets. One of those is central Europe, which was the wallflower during the dance of Western consumerism, but has the opportunity (which it is seizing) to jump from state-controlled retailing to state-of-the-art hypermarkets, without suffering the development pain of the in-between years.

Doubtless Wal-Mart’s recent acquisition of Asda forms part of this worldwide retail game. A process of natural selection will ensure that only the fittest survive.

Part of this fitness will be driven by efficiencies of information technology, bringing the Internet to bear effectively on consumer markets.

Another part will be driven by the ability of the international retail majors to embrace the product lines that are currently less efficiently and more expensively delivered by national and domestic providers.

That brings me back to financial services. We have seen, at the UK domestic level, the likes of Tesco develop into the provision of some banking services. Of what, to date, we have witnessed precious little is financial services companies exploring new retail opportunities through branch networks other than their own.

It is one thing for NatWest to cover all its strategic domestic marketing options by merging with L&G, quite another for it to explore a merger with a retailer that can open entirely new markets. Furthermore, it is one thing to play the domestic game, where the market is, in any event, saturated, but quite another to explore new global markets.

While our financial services giants are still content to buy market share in the UK, I guess the initiative will have to come from the developing breed of global retailers. I, for one, cannot wait for a Wal-Mart or a Carrefour/Promodès to bid for a British bank.

George Pitcher is a partner of issue management consultancy Luther Pendragon.


    Leave a comment