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Wednesday, August 18, 1999 Published at 07:32 GMT 08:32 UK


Business: The Company File

Why bigger is not always better

Some say the odds of a merger succeeding are only 50-50

Globalisation is the challenge, and for big business mergers are the solution. However, all too often the multi-billion dollar deals turn sour.

The battle of three French banks over who should merge with whom is the latest example, and the managers making the deals might pause to ask if the end result will be worth it.

The six-month battle involving BNP, Paribas and Societe Generale has been fought via advertising and in courtrooms, two costly arenas.

Investors scrutinising the minutiae of the legal battles should worry if such a merger will create shareholder value.

Chances are it won't. Whatever the logic or likely success of the French bank merger, analysts agree that many mergers are hit or miss.

Commerzbank research -some of it anecdotal - says that more than half of mergers ultimately fail to create value.

Merger gains may have a short shelf life, Commerzbank said, with the merger only temporarily offsetting an inevitable decline.

"Some research does show that companies don't deliver on all the promises they make," Stephen Barrett, head of mergers & acquisitions at KPMG, said, but he added that "many do create shareholder value".

The problem, he said, was that little empirical evidence existed as to the success of merger and acquisition activity.

So which mergers are successful and why?


[ image: Deutsche Telekoms Ron Sommer looks for ways to create value]
Deutsche Telekoms Ron Sommer looks for ways to create value
Crucial to success, Commerzbank said, is knowing why you are merging. For some companies it is clear, Deutsche Telekom has seen its domestic market share drop to 70% since the telecom markets were liberalised. Chief executive Ron Sommer is looking for overseas partners to help it recoup its losses.

Barrett says a ruthless approach is key, pointing out that when UK bank Lloyds bought Cheltenham & Gloucester and then TSB, it was not afraid to wield the scalpel. "They also sold more product," he said.

The value delivered by cutting costs has to be offset against the cost of the acquisition to assess how much money has been made.

Mergers born out of defensive reasons are unlikely to fare well.

"When they don't work, the two key management groups do not blend well together," according to Mr Barrett. "The important thing in a merger is to make it crystal clear who is going to lead the operation."


[ image: Franco Bernabe was forced to leave Telecom Italia when it was taken over]
Franco Bernabe was forced to leave Telecom Italia when it was taken over
He used the example of the recent battle to gain control of Telecom Italia. "With Deutsche Telekom and Telecom Italia, there was great talk about two chief executive officers working side by side. These were two very opinionated, dynamic individuals."

In the end when shareholders opted for the bid from Olivetti's Roberto Colaninno, Telecom Italia's chief executive Franco Bernabe had to leave.

Failure to create value can be down to "poor preliminary auditing of the target company" as well as "inadequate post-acquisition goals", Commerzbank said.

Year of the merger

Company news continues to be dominated by mergers, with 1999 set to become the year of the European super merger.

The single currency has made it easier for US companies - and other European companies - to do business across Europe. In order to protect market share from new competitors, European companies feel they need to grow. In addition, the euro has made t is easier for them to raise the cash to buy other companies.

Domestic corporates have found that - more than before - other European, US and Asian companies want to enter their market. The best - or at least - the most obvious form of defence is attack, and one of the easiest ways to secure fast growth is to buy another company.

Also, companies are more likely to go on the prowl because it is easier to borrow the cash to do so. The advent of the euro means that investors in the eurozone can lend money to companies without any currency risk. Low interest rates also help.

Olivetti's bid for Telecom Italia was made possible by its borrowing on the eurobond markets.

Government sales

Another factor spurring European merger activity is privatisation. The sale of government-owned businesses has meant that larger companies with the ability and inclination to acquire are coming on to the market.

These companies are not just acquirers, but also targets, as was the case with Telecom Italia.

Recent figures on merger activity show that cross-border activity, at least, looks set to break new records in 1999.

KPMG statistics show that 1999 looks set to be a record year for cross-border mergers and acquisitions.

The total for the first half of 1998, a year in which all records were broken, was $243m. This has grown to $409m in the first half of 1999, an increase of 61%.



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