Archive for September, 2007

Is this merger wave over?

Posted on Wednesday, 26 September 2007. Filed under: Business History, Commentary, Mergers |

Regular readers of this blog will know how often I look for the historical parallels to current events.  It is therefore very heartening to see others do this as well.  Helen Thomas at FT Alphaville has been reporting on the disappearence of the M&A market in August and September (see her two most recent articles:  The incredible shrinking world of M&A and Piff, Paff, Poof — UK M&A Vanishes).  Yesterday, Helen reported in a blog entitled Six weeks doth not an M&A trend make on the unnamed ‘prophets at UBS’ who wrote drew on parallels to earlier merger waves to reach their conclusions about what’s happening to the M&A market today:

Few public-to-public deals have been pulled, and we are not surprised CEOs are deferring what are key decisions. Our analysis of M&A during the US S&L, and LTCM/Russian debt crises suggests it is too early to write off corporate M&A.

While showing a chart of M&A activity correlated to stock market activity back to 1980, Helen then goes on to write: 

 Of course, what does put an end to M&A activity is a stock market (as opposed to credit) panic and/or something that feels like a good old fashioned recession…

In discussing the current volumes with several of the bulge bracket M&A bankers in the past several weeks, I’ve been told that they would concur with the FT  and the folks at UBS.  That is, the current market has certainly seen deals postponed, but most deals haven’t been pulled.  Yes, it may be more difficult to get large amounts of committed funding for deals to take place today, but the funding commitments aren’t being cancelled. 

Postponement may actually be good for the shareholders of the acquirers.  It may help eliminate some of the hype and slow down in some cases what might have been perceived by boards and shareholders to be an unstoppable deal.  Hopefully it will take the wind out of the sails of marginal deals.  These marginal deals would ultimately have been the statistics that pull the success rate of M&A deals downwards.  It’s not bad to see them postponed forever.  But the strategic deals that made sense two months ago, will largely still make sense today.  Some will reprice, which may assist the post-deal success.  Others will transact at the same price and terms as earlier, but today’s pause — the addition of time to prepare for the post-merger integration period — improves the likelihood of long term deal success. 

No, the wave isn’t over yet (although we may have seen the peak already), and the come-back (second bounce?) may be even better because of this current slowdown in deal activity.

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What Price Northern Rock?

Posted on Wednesday, 19 September 2007. Filed under: Business History, Commentary |

How low can it go?  That’s the question on the minds of many about the bid price for a buyer of Northern Rock.  Of course, bid prices can be negotiated upwards, but the initial bid does set a floor of sorts on the transaction.

Check out Interactive Investor and their commentary today by Richard Beddard on the topic (quoting us), entitled ‘From bail-out to buy-out’ and

A popular assumption is that somebody’s going to buy Northern Rock, or its assets and that, along with the various guarantees offered by the Bank of England and the government, must be informing the decisions traders are making.

According to Citywire on Monday, broker Keefe, Bruyette & Woods has valued the bank at 475p a share, “somewhere between its net asset and run-off values”. I put that figure to Professor Scott Moeller, a mergers and acquisitions expert at Cass Business School and fellow blogger.

He says the price depends on the nature of the buy out. Whether there is a strategic buyer, which he thinks is increasingly unlikely (I presume a strategic buyer might pay a higher price), or whether the buyer is after the distressed assets (”more likely now”). “I’ve heard some numbers around 185p/share in that instance.” He says, “It’s a moving target”.

As I write, the share price is 280p, so despite all the guarantees it seems to me trading in NRK is still speculative, and the ‘floor’ under the price could be lower than some traders expect.

That’s just my view, though. Scott wrote an article for the BBC on the potential for a carve up at NRK on Monday.

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Selling Northern Rock

Posted on Tuesday, 18 September 2007. Filed under: Commentary, Mergers |

Interactive Investor has a very thoughtful blog posting on 17 September on the topic of ‘what next for Northern Rock’, including a reference to our own comments from a day earlier and further comments on 17 September (including our article written for the BBC). 

It is worthwhile checking out the aforementioned blog of Interactive Investor’s editor, Richard Beddard’s,  as he properly notes that ‘the credit squeeze that stopped the buyout business in its tracks looks set to jolt it back into action’. 

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Why would anyone buy Northern Rock?

Posted on Monday, 17 September 2007. Filed under: Commentary, Mergers |

For those who don’t read the BBC website, I copy here an article on Northern Rock as an acquisition candidate that I wrote today for the BBC (  This follows on the comments that I wrote late yesterday on the same topic (which can be found on this blog here).

Why would anyone buy Northern Rock?

Professor Scott Moeller
Mergers & Acquisitions expert at the Cass Business School in London

Scott Moeller

There is a lot of speculation now about Northern Rock, the beleaguered UK mortgage bank. That is not surprising, of course, now that it has been knocked down by the market and bailed out by the Bank of England.

Its share price has plummeted, too.

But that lower share price begins to make it more attractive to the vultures that invariably circle when a company is in distress.

Carve up?

A potential buyer does not have to purchase all of Northern Rock.

Northern Rock retains some attractive assets


In fact, even if someone did buy it “lock, stock and barrel”, it would probably be with the intention of selling off some pieces.

That was the case when Morrisons sold off some of Safeway’s stores after its acquisition.

Royal Bank of Scotland intends to carve ABN Amro into at least three pieces, sharing some with Santander of Spain (the buyer in 2004 of Abbey National) and Fortis of Belgium.

Also, the hedge funds and private equity firms – recently in the press and still awash in uninvested funds – do a lot of business buying distressed assets.

They find the good bits and sell those off for a profit after they have cleaned them up and repackaged them.

Good assets

Northern Rock retains some attractive assets, even if its own formerly good name is not one of them.

As of early on Monday, it was reported that less than 10% of deposits had been withdrawn.

And even if you withdraw most or even all of your money, your relationship with the bank may remain.

Northern Rock’s mortgage portfolio is largely unchanged by the events of the last week, although the firm is clearly not writing new mortgages at the same pace as previously.

A buyer of Northern Rock could rebrand the assets, and Northern Rock has never been the strongest brand anyway.

Bank acquirers have not hesitated in the past at discarding excellent brands: look at what HSBC did to the very well-known Midland Bank in the last decade.

Few customers apparently left Midland because their bank cards no longer had a picture of the Midland’s phoenix and instead showed the very impersonal HSBC two-triangles logo.

Foreign bidders

From a strategic perspective, a foreign buyer is the most likely at this time, especially a bank with little current exposure to the UK retail banking market.

Inherently, the UK mortgage market is attractive


This would probably be the preferred route from the perspective of the Bank of England, too, despite the obvious disadvantages of having a foreigner buy a UK bank currently being propped up by the British taxpayers.

A continental European bank might be keen, especially a one-country bank in the Eurozone.

Dutch bank ING has already done wonders with its purchase of Barings, which it got for £1 after Nick Leeson’s $1.6 billion fraud in 1995.

Would it like a UK retail and mortgage presence as well?

But the list of potential buyers need not be limited to those in this time zone.

This is the era of Asian purchases, so it could be someone even further afield.

Conventional wisdom

Inherently, the UK mortgage market is attractive.

It will remain highly cyclical (especially with housing prices at a peak), but is fundamentally strong for a buyer willing to invest for the long term.

Not that it would be that easy for any buyer right now.

The conventional wisdom about acquisitions bears repeating: historically, two-thirds or more of acquisitions have been failures.

They have not provided good return to shareholders nor met their strategic or financial goals.

Employee redundancies are high, often as much as 10% of the target company’s workforce.

There is some evidence from our own research at Cass Business School, together with Towers Perrin, that deals since 2003 have reversed this trend, but still it is hard work to make any acquisition successful.

And this is even more difficult with a tainted company where many customers are leaving.

Any buyer had best tread very carefully into this mess.

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Northern Rock as an Acquisition Candidate

Posted on Sunday, 16 September 2007. Filed under: Commentary, Mergers |

Lots of speculation now in the press about Northern Rock, the beleagered mortgage bank in the UK.  Not surprising, of course, now that they’ve been knocked down by the market and bailed out by the Bank of England.  With a corresponding plummeting stock price, too.  

It can be expected that the vultures would begin to circle, and fast:  looking for the parts of Northern Rock that may be available.  Any large UK bank would be remiss if it didn’t have a team looking at Northern Rock’s assets.  The same is true of foreign banks wishing to have a UK presence or wanting to expand an existing UK presence (why does the acquisitive Grupo Santander, the purchaser of Abbey National in 2004, come to mind, and even though they are somewhat distracted by their part in the expected purchase of ABN AMRO?).  

Inherently, the UK mortgage market is attractive:  it will remain highly cyclical (especially with housing prices at a peak), but is fundamentally strong for a buyer willing to invest for the long term.

Banks that have been in trouble can prove to be very attractive to the right purchaser.  Just because a bank is tainted doesn’t mean that there is no value.  In fact, Merrill Lynch posted a ‘buy’ recommendation on Northern Rock’s stock last week AFTER the Bank of England bail-out (but after the share price decline, of course), as reported in FT Alphaville

Remember as well the purchase of Bankers Trust by Deutsche Bank in 1999 for $10.1 billion (after BT had regulatory and legal problems with its derivatives business dating back to 1994), or ING’s purchase of Barings Brothers for £1.00 after Nick Leeson’s $1.6 billion fraud in 1995.  With the benefit of hindsight, both those deals turned out to have been strategically critical to the current competitive positioning of the two acquirers.  Someone can be expected to do the same with Northern Rock.

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M&A and the value of historical perspective

Posted on Saturday, 15 September 2007. Filed under: Business History, Commentary, Mergers |

Thanks to Andrew F. and his comment here which mentioned the importance of looking back to the late 1990’s in trying to keep a calm perspective on the current turmoil in the market.  We have noted earlier on this blog the parallels between the arms races of the Cold War and how the merger markets develop (see the blog commentary, ‘Merger Waves, Arms Races, and the Cold War’).  Lastly, there was a Harvard historian interviewed in ‘Management-Issues’ (which is also listed on our blogroll at the bottom of this page) who commented on why great business leaders would benefit from a better understanding of history (see  ‘Niall Ferguson on history and business leadership’). 

 I’d like to add another perspective on this topic.  The fact is that there ARE many historians already active in business.  This is also not a new phenomenon:  when I was hired by Morgan Stanley in 1983, it was a private partnership with a management committee of four.  All had majored in History when they were undergraduates (two at Yale, two at Princeton).  (Notably, all four also then went on to get their MBAs before entering investment banking.)  The 1980’s were a time of great success for Morgan Stanley, and I think the success of the firm in those days can, in some way, be attributed to some of the same perspective noted by Professor Ferguson, especially on the qualities of great leaders and how they differ between the military and political arenas and the business arena.

Our recent book on M&A looks at how military and business intelligence techniques can be applied to mergers and acquisitions.  This necessarily builds on an historical perspective as well.  We couldn’t have writen our book without drawing numerous lessons from many case studies, including some classic business deals that date back to the 1980’s (such as KKR’s acquisition of RJR Nabisco), but also some other deals (the oldest one referenced in the book being the UK’s merger of the Foreign Department with the Diplomatic Service back in 1919).

One important bias to note:  my own first two degrees were also in history, and I had the great fortune to write my Master’s Thesis under the tutelage of the master historian of 20th Century American history, John Morton Blum, now an Emeritus Professor at Yale. 

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When will this merger wave end? Part 2

Posted on Monday, 10 September 2007. Filed under: Commentary, Mergers |

After writing the post last week on the end of this merger wave, I saw some comments on FT Alphaville from Morgan Stanley about now being the biggest market buying opportunity in a long time.  Their analyst is very bullish — and this from the same Morgan Stanley analyst who urged ‘sell, sell, sell’ back in June, according to the Financial Times.  

 Look at two of the comments:

This final leg of the bull market will be characterized by all the things we have not seen yet this decade, including big retail buying of equities, big strategic M&A, an increase in corporate confidence leading to a capex boom and multiple expansion in equity markets.

We recommend investors start buying equities. The scenario we think is most likely is that this is a bull market correction, and that markets will go to new highs before this bull market finishes.

But there’s an acknowledgement that this not yet the consensus view.

We received a healthy amount of pushback on our call from mid-August to start buying equities again. Pushback is good. We know that we may well be on the right track with a call, when we get a lot of investor pushback. It means we are not consensual. Six to twelve months later, with the benefit of hindsight, we know we will look very silly or very right.

This links well with our comments here last week about the end of the merger wave (‘When Will This Merger Wave End?‘) wherein we suggested that some will see the recent downturn as a time to buy companies cheaper than they could have done so a few months ago.  This does make sense — and especially if you believe Morgan Stanley’s analysts — if the deal was already being planned before the recent market declines and if paid with cash (not affected by the downturn) or with shares that had not plummetted as much as the target’s.  Note that Morgan Stanley’s analyst also suggested, as we did, that strategic investments (and not the financial ones from hedge funds and private equity investors) could drive this next period of mergers.

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When will this merger wave end?

Posted on Wednesday, 5 September 2007. Filed under: Commentary, Mergers |

The hottest topic in M&A circles right now is when the current merger wave will end — and is it actually already in a downturn?

There are as many opinions about this as there are experts, of course.  Several factors have combined to make this topical.  Among others, I’d like to comment on three:

  • Obviously, the market turmoil of the past several months — following the subprime credit market problems that have spilled over into the global economy generally — is a major cause of any downturn.  But for those awash in cash (and there is still a lot of cash in corporates and funds), this only makes targets less expensive and could accelerate a deal that had been in the planning.  For some, this is a time of buying opportunity.  Also, many companies have not had their shares affected much by the downturn in the markets, and therefore they could still make an offer using stock, and perhaps for a target that is cheaper than it would have been several months ago.  For example, a company wanting to buy into the financial services industry would find bargains today.
  • The length of the current merger wave would indicate that it needs to come to an end sometime soon — at least if we look at the longevity of the merger waves since the late 1980’s.  This merger wave started in 2003.  We are therefore now four years into the current merger wave.  The late 1980’s and late 1990’s merger waves did not last this long before turning down.
  • At some point the acquisitions made in the past four years by the private equity, venture capital and hedge funds need to be monitized.  These financial investors have been driving much of the acquisition activity since 2003.  These firms are not long term investors in the same sense that a corporation acquiring another company for strategic reasons probably does not plan to exit that business in five to seven years to return funds to investors.  In previous merger waves (with the possible exception of the LBO activity of the late 1980’s before the junk bond markets closed with the demise of Drexel Burnham), the level of activity at the peak was driven by strategic investment — or at least the companies making the purchases thought they were making strategic investments!  The financial investors will need to sell their purchases at some point — and those who made purchases in 2003 and 2004 must be looking for exits soon.  As these come to market, there could be a supply / demand imbalance.

Consensus — and my own opinion — would say that the activity in the second half of 2007 will be significantly lower than the first half’s volume (this is evident already with the deal volumes announced in the summer, but the summer is typically a slow period anyway).  M&A dealmakers at the leading firms confirm this privately.  Backlogs remain high and their staff are still working very long hours, but the backlog is no longer growing. 

But don’t forget:  the downturn does not necessarily spell the end of mergers.  The lowest point in the down cycle in merger activity recently (2001) was still higher than the peak of merger activity in the 1980’s merger wave.  This is likely to be the case this time around, too.

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