Archive for November, 2007

Investment Banking Mergers?

Posted on Wednesday, 21 November 2007. Filed under: Commentary, Mergers |

There’s been a lot of talk in the past few weeks about whether the so-called ‘credit crisis’ has weakened a number of investment banks so much that they are now likely targets.  Just look at Top Firms said to be Takeover Targets, for example from Here is the City.  That entry ponders the independent future of Morgan Stanley, Merrill Lynch, Lehman and Bear Stearns and quotes Bloomberg’s analyst Matthew Lynn.  Most likely acquirers, he says, are the large non-US banks such as HSBC, Santander, Deutsche and even China’s ICBC (Industrial & Commercial Bank of China) — all with market capitalisations well in excess of those four companies and with less exposure to the US credit problems that have plagued the US-based companies.

We think that such acquisitions are not likely — although acknowledging that Lehman and the Bear are always on everyone’s list of acquisitions for firms looking to gain exposure to that segment of the financial services industry.  (And in more normal times, those two firms always seem to have a small takeover premium built into their ‘normal’ share price.) 

Not that consolidation of the industry wouldn’t be intriguing at this point.  But rather than being acquired by a firm that would gain the upper hand because of recent events, why not consider a merger between some combination of those four firms.  Merrill Morgan Stanley or Morgan Stanley Merrill?  Stranger things have happened.  Would that both Johns (Thain and Mack) could be so creative.  At least it would allow the two companies to hide many of the sins of the recent past and would provide a formidable competitor.  It would also give the newly combined company the opportunity to divest divisions as well. 

Given the global nature of the business, it shouldn’t even be of too great concern to the competition authorities, although they are certain to protest.  By the way, the other possible names of such a combination (‘Morgan Merrill’ or ‘Merrill Morgan’) can’t be used, I understand, because of an agreement that goes back to the original break-up of John Pierpont (J.P.) Morgan’s empire in the early 1930’s that prohibits Morgan Stanley or any of its successors from using the ‘Morgan’ name without ‘Stanley’ to follow — a right reserved for the other major part of that former empire, JP Morgan. 

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Interlocking Directorates and Mergers

Posted on Monday, 19 November 2007. Filed under: Business Intelligence, Commentary, Mergers |

We love to see the application of new intelligence techniques in assessing mergers, acquisitions and divestitures.  Check this out… 

A most interesting comment was posted on this blog on 19 November in response to our own thoughts regarding the possible break-up of Merrill Lynch, Citibank and Northern Rock (see More about breaking up Merrill Lynch, Citi and Northern Rock and the comment added at the bottom of our blog on that day).  That comment is from a website entitled News Visual which uses knowledge maps to look at the links between companies. 

This technique is not uncommon in places such as business schools and consultancies, and that website shows how it can be particularly useful in a merger or acquisition situation.  Links between the two companies may not be direct but the News Visual website shows where these exist.  Most of the information appears to come from public regulatory filings in the US, so non-US deals appear to be less covered;  nevertheless, it is all very useful. 

A few examples from their website: 

The comment about the News Visual website that was left on our own blog also merits some attention.  We’ve written several times that a number of firms might face dismantling as they fall from grace.  As noted before, we (and now many others) have suggested this is possible for Northern Rock, Merrill Lynch and Citibank.  But a close look at the strong connections of the new master of Merrill Lynch (John Thain) has casued News Visual to come to a different conclusion:  given all the people John Thain knows, he can draw on those connections (both personal and corporate) to help him succeed where others, presumably Stan O’Neal, failed — with the implication being that Thain’s predecessor was less well connected (see the blog entry:  Past Experience and Connections Valuable as John Thain Steps Up to CEO Role at Merrill Lynch).  They have concluded as well that Chairman Robert Rubin’s connections at Citibank  can help to save that bank, too (see the blog entry: Former Ties Offer the Advantage as Rubin Takes on the Challenge as Citigroup’s Chairman).

All very useful if you want to look whether a deal — or inverse deal (otherwise known as a break-up or divestment) — is likely.  Not that these knowledge maps should be used in isolation, but they do provide useful information … and as we’ve often written (including in our book, Intelligent Mergers), information is power. 

Thank you, News Visual for producing these, and we do intend to look at them in the future as well. 

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More about breaking up Merrill Lynch, Citi and Northern Rock

Posted on Friday, 9 November 2007. Filed under: Commentary, Mergers |

There’s been a major market shift.  Of course there’s still new deals being announced, as the current merger wave is most definitely NOT over.  Note the record-breaking BHP Billiton £67 billion bid on 8 November 2007 for Rio Tinto (see FT Alphaville‘s announcement of this deal), a deal that is likely to be front-page news for a while as the deal is likely to go hostile and it has significant competition / monopolies / anti-trust concerns.  We haven’t had a good fight on the front pages of the business news since RBS beat Barclays to the ABN AMRO prize.  And if there are any other doubters about the continued progress of the current merger wave, then note that the volume of deals in the ‘slow’ third quarter of this year for EMEA was just about the same as the average volume of deals in all of 2006 at just over $400 billion — the record year of this merger wave thus far;  and thanks to Credit Suisse for this analysis).  October was the third strongest month globally this year for announced deals, too.

But the most interesting development recently is the suggested  breakup of various banks that have gotten into trouble with the recent credit and liquidity crisis.

Readers of this blog will have noticed that we first suggested the possible break-up of Merrill Lynch (see No Merger: Just Split up Merrill Lynch).  There have been many suggestions to do the same with Citi (for just one typical example, see Here is the City yesterday with it’s article Rivals Lick Lips at Prospect that Big Firm is Broken Up).  Even stranger is the lack of logic as to the firms rumoured to be break-up candidates and those who could be the purchasers of big pieces of those targets:  Morgan Stanley just announced large losses on the order of $3.7 billion, but is suggested to be a buyer of the retail side of Citi (a prospect that this writer finds just too far out, as the management of Morgan Stanley is more likely to be comfortable with added capability in the institutional side of the business than the retail side that would bring back memories of the frustrations with the Dean Witter merger of the late 1990’s).

There’s also the farce known as Northern Rock.  Will it be purchased (and possibly by those outside the industry such as Richard Branson’s Virgin, although recently the focus has been on Asian purchasers)?  Will it survive independently?  (Many people think that the smart money seems to be on this option now.)  Or should it be broken up as well?  The problem here is that the natural domestic UK buyers for it’s assets would face competition concerns (unless the Richard Branson option really does have legs or there is someone else who thinks the UK mortgage market is an attractive long-term strategic business.)  My own thoughts would see Northern Rock broken up, after a restructuring firm (or hedge fund, private equity fund or other similar organisation) cleans it up.  We haven’t changed our opinion from what we’ve noted before on this blog back in mid-September  (What Price Northern Rock?) and also in an article we wrote for the BBC (Why would anyone buy Northern Rock?).  We understand that there are several firms poking around the bank and seriously considering such a purchase — but quietly, as they do not want to push the price up.  Stay tuned.

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