12 May 2014

Week ending 9th May 2014

M&A Pfizzing!

For some time one of the frustrations for the UK government as they attempted to kick start the economic recovery was the huge cash balances being hoarded by many businesses which they seemed reluctant to spend.  Not only was this holding back growth, but also preventing the emergence of a more balanced economy.

Now with confidence returning companies in the UK and in other countries, notably the US are starting to invest again.  However they are not focusing so much on new plant, new premises, developing new markets etc. but rather on merger and acquisition.  M&A activity is now at its highest for over 6 years.  There were a number of big M&A’s making the business and political headlines last week with the real biggie on both counts being the Pfizer bid for AstraZeneca.

When I first heard about this I was puzzled as to why a fizzy drinks company would want to buy a pharmaceutical business.  Then I realised of course that Pfizer is actually a global pharmaceutical business, famous for those little blue pills that help gentlemen stand to attention even when all they want to do is go to sleep!  Apparently a Charles Pfizer was one of the co-founders of the company, so hence the name.  Quite an appropriate name when you think about the little blue pills!

Although a dominant force in the global pharmaceutical industry for decades Pfizer faces challenges as its patents run out.  The patent on its biggest selling drug Lipitor ran out in 2010.  To counter this since 2000 Pfizer has pursued a strategy of growth by acquisition, the last being Wyeth for US$68bn in 2009 and now it is after AstraZeneca.  Most analysts and business commentators judge that this strategy has destroyed shareholder value rather than created any.  Much has been written in the media last week about how Pfizer cut jobs and research capacity and investment as it chased the “synergies” from each acquisition.  Furthermore in 2009 Pfizer broke all records when it was fined $US2.3bn for illegal marketing of its products.  This was the fourth time it had been found guilty of this and similar illegal practice.

This is the core of the concern over the bid for AstraZeneca. Do we really want to let a company with this kind of brutal post acquisition track record and contempt for legal, never mind ethical business practice into our backyard?  To be fair to Pfizer it has new leadership today, but in spite of this and all the assurances from Pfizer if the fox is still a fox will we end up with a lot less chickens?

Should government intervene?

It is not surprising that this has become a political hot potato.  Even though AstraZeneca is an Anglo-Swedish company, run by a Frenchman, chaired by a Swede with operations in 100 countries, the Pfizer bid is being portrayed as an assault on British jobs and the British science base.  Ed Milliband has accused the government of “cheer leading” the bid and has called for a “national interest test” to be applied on all foreign bids to takeover British companies.  As usual with his bright ideas Milliband does not spell out exactly what a national interest test would be and he really needs to be careful what he wishes for.  If a national interest test had been applied to him, then he might well not be leader of the opposition!

The government is trying to give the impression that it is taking a “hard-nosed” approach to seeking assurances from Pfizer on jobs and research investment.  The question is how much can they trust Pfizer to deliver on its assurances?  The answer to this question is not a lot if at all.  Apart from the track record we have the wonderful answer given by Pfizer CEO Ian Read to a question put to him last week.  When asked whether Pfizer would break up AstraZeneca he replied “we will conserve that optionality”.  Now that tells you all you need to know.  The cunning fox is still a fox and if you let it into your backyard it will do what foxes do to your chickens, if and when it thinks it can get away with it.  So the only safe assumption is that Pfizer will at some point behave exactly as it has in the past.  So the question is can government do anything about it?

If AstraZeneca shareholders want to sell then there is not much strictly legally they can do to stop this and in a free society nor should they.  However this is where “having an industrial policy” comes into play.  This government and its predecessors claim to have one but it is difficult to see what it is exactly.  However in this case the implications are simple.  If you do not have a policy you just let whatever is going to happen, happen and use the desirability of preserving a free market as your excuse.  If you do have one then you can sit down with the parties involved and spell out the rules of the game.

One of the attractions of this deal for Pfizer is that they can move their HQ to the UK and enjoy our now low business tax regime.  Our government should tell Pfizer that whilst we are happy to welcome overseas businesses to the UK to enjoy the lower tax regime it is not available to just anybody.  In exchange for lower taxes we expect them to create extra value for the UK in terms of jobs, investment, skills and knowledge.  Where having an industrial policy comes in is that you can spell out clearly what that means when applied to a particular situation.

Government does not have a lot of “hard power” for this, but it does have buckets of “soft power”, if it cares to use it.

The French do this differently

Running almost unnoticed under the Pfizer/AstraZeneca story is a $US17bn bid from GE for French company Alstom’s turbine business, which includes its nuclear facilities and power grid businesses.  In spite of the Alstom board agreeing to the deal, assurances from GE on French jobs that go way beyond anything Pfizer has so far promised with AstraZeneca, the French government has said “Non”.  Any government that can declare a yogurt maker a “strategic industry” as the French did when blocking a bid for Danone a few years ago, is always going to say “Non” to any deal on Alstom.

They have gone further by demanding an “equal partnership” deal with GE (whatever that means!) and bringing in the combination of the two companies rail businesses.  As a final piece of confusion they have brought in Siemens as a counter bidder.  This seems to have come as bit of a surprise to Siemens who have enough problems of their own right now, without adding Alstom’s to them.

The French have an industrial policy which is very simple.  It’s going to be all or at least mostly French.  They are subject to the same rules and regulations as the British Government in all this, but the difference is that the French don’t think they apply to them.  In fact they KNOW they don’t.  This is the only explanation for why Peugeot Citroen are still in business.  Whilst I would not advocate going to the extremes that the French government employs it does demonstrate how the skilful use of “soft power” can get you what you want, if you know what that is.

L’Entente Impossible

10 months ago two of the world’s biggest advertising agencies, New York based Omnicom and Paris based Publicis announced they were to merge.  What’s more it was be a “merger of equals”.  Now this is a French company and an American company proposing to merge as “equals”.  What are the chances of that coming off?  Well last week it was confirmed that there was no chance when the whole thing was called off.  They couldn’t even agree on who should be the Chief Financial Officer of the merged group.  Perhaps Omnicom did not understand that Publicis meant CFO would stand for Chief French Officer!

If it had come off it would have created the world’s biggest advertising agency.  Well it has achieved that, only it is Sir Martin Sorrel’s WPP that has retained this title.  While negotiations dragged on, costing millions, WPP picked up clients like Vodaphone, M&S, Compare the Market and others from Publicis and Omnicom.  Samsung, the biggest advertising brand spender in the world has placed its account with Publicis under review.  Publicis and Omnicom have managed to destroy value without even merging!

Another outcome is that the financial advisors involved were likely to be on a “no deal no fees” deal.  As both parties have called this off it is estimated that around $US70m won’t be paid to advisors.  Perhaps there is a God after all!


Well this is one “merger of equals” that looks like it could actually come off.  Whether this is a good or a bad thing for shareholders and customers, only time will tell.  However there is one reason why I am not optimistic.  In the past I have consistently criticised Dixons for their abysmal customer service.  Equally consistently they announced time after time that they were tackling this, but customers did not see a difference.  In the last 12 months or so I have discerned an improvement.  Staff in their stores actually seemed to know something about the product and even where the product you were looking for might be.  It wasn’t brilliant, but it was better and clearly something has changed.

Now they are merging with Carphone Warehouse to become CarphoneDixons.  Carphone’s own reputation for customer service was probably even worse than Dixons, which means they must have been trying hard to be that bad.  Given that post-merger performance standards tend to fall to the lowest common denominator rather than rise to the best, will Dixons nascent customer service improvement be strangled before it becomes fully established?


After reading the above you may be thinking “why do they bother”?  Well that is a good question.  The one aspect of M&A that is never mentioned is the fact, and it is a fact, that it usually doesn't work.  Research over many years has consistently shown that whether in good times or bad at least 50% of M&A deals result in destroying value and this can be as high as 80%.  So all the above with all the millions involved has at best a 50% chance of success.
For any of you who are currently in or are contemplating an M&A project here are some tips.
  • If anyone mentions the word “synergies” take tight hold of your wallet
  • If they go on to produce spreadsheets to demonstrate these synergies, suddenly remember you have to be somewhere else.
  • If the value to the customer is not clearly set out and explained early in the proposal, forget the whole thing.  This will save you a lot of time and money.
So that was some of the week before this week. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week.

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