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Monday, 17 January, 2000, 17:58 GMT
Culture clash: The risks of mergers
When America Online and Time Warner announced at the start of the year that they were joining forces, a round of mega-merger euphoria swept the stock markets with dealers looking forward to a lucrative future dominated by the internet.
However, in the days that followed the share prices of the two companies dropped back as analysts asked how well the merger would work.
Was this really the way forward? Internet portal Yahoo said firmly no, and that it had no plans to enter into a similar deal.
All too many mergers undertaken with the highest of hopes have failed to deliver. Too often culture conflicts and personality clashes hamper the new company's performance.
There have been many problems with integrating the two firms, not least conflicts of interest between partners' investments and the giant group's audit client list.
Is bigger better?
Globalisation is the challenge, and for big business mergers are being seen as the solution.
The battle last year between three French banks over who should merge with whom might give the executives forging new deals cause to ask if the end result will be worth it.
The six-month battle involving BNP, Paribas and Societe Generale was fought through advertising and in the courtrooms, two very costly arenas.
Investors scrutinising the minutiae of the legal battles should worry if such a merger will create shareholder value.
The chances are it will not - analysts agree that many mergers are hit or miss. Commerzbank research says that more than half of mergers ultimately fail to create value.
Crucial to success, Commerzbank says, is knowing why you are merging.
For some companies it is clear. Former monopolist Deutsche Telekom, for example, has seen its domestic market share drop to 70% after the telecom markets were liberalised. Ever since, chief executive Ron Sommer has been looking for overseas partners to help recoup the losses.
Cut and thrust
It seems a ruthless approach is the key. When UK bank Lloyds bought Cheltenham & Gloucester and then TSB, it was not afraid to wield the cost-cutting scalpel.
But the shareholder 'value' delivered by sacking workers and closing branches has to be offset against the price of the acquisition to assess how much money has really been made.
Mergers born out of defensive intentions are generally deemed unlikely to fare well.
Stephen Barrett, head of mergers & acquisitions at accountants KPMG, said: "When they don't work, the two key management groups do not blend well together.
"The important thing in a merger is to make it crystal clear who is going to lead the operation."
He used the example of last year's 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 rival 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", says Commerzbank.
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 introduction of the euro has made it easier for them to raise the cash to buy other companies.
Domestic firms have found that - more than before - other European, US and Asian companies want to enter their market.
The most obvious form of defence is attack, and one of the easiest ways to secure fast growth is to buy another company.
Companies are now more likely to go on the prowl because it is easier to borrow cash to do so. The advent of the euro means that investors in the eurozone can lend money to companies without any currency risk. Relatively low interest rates also help.
Olivetti's bid for Telecom Italia was made possible by its borrowing on the eurobond markets.
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 rivals are coming on to the market.
These companies are not just acquirers, but also targets, as was the case with Telecom Italia.
Figures on merger activity show that records for the total value of company tie-ups were broken in 1998 and again in 1999. Already, less than three weeks into 2000, there is little doubt that this will be another record-breaking year.
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