Archive for March, 2009

Great: A big deal! Merck / Schering-Plough

Posted on Wednesday, 11 March 2009. Filed under: Commentary, Mergers |

It’s nice to see that I can hold my head up high in my Mergers & Acquisitions classes again and say that the M&A market isn’t dead … despite many obituaries having been written recently by many in the press. 

I was teaching Mergers & Acquisitions with a group of non-executive directors in the healthcare industry earlier this week.  It’s been a long time of teaching since I’d been able to discuss a current deal with my class.  Thank you, Merck.  I have a new class of MBA students that starts on Thursday of this week and it is great that I can kick off the class with some discussion of a front-page mega deal.

The news was that earlier this week, Merck announced a mega-deal in agreeing to take over it’s rival Schering-Plough for $41 billion.  This was the second big global pharmaceutical deal in six weeks (following Pfizer’s $67 billion purchase of Wyeth).   Do two deals make a trend?

Why does this make me so happy?  Simple.  The deal made the front page of the Financial Times (see the story that appeared on the front page 10 March 2009 here).  I could hold up the paper in class and say ‘See, here’s a deal that we can discuss.’  Current deals are always more fun (not that the ‘old’ deals are unexciting:  I certainly enjoy teaching the case study I wrote on Malcolm Glazer’s acquisition of Manchester United (I think the football (soccer) fans in the class enjoy it as well, even if they are Arsenal, Chelsea or even Bayern Munich supporters) or the very exciting takeover attempt by Sir Philip Green of Sir Stuart Rose’s Marks & Spencer).  Note that two years ago when I went into a lecture or conference, I could hold up the Financial Times and say:  ‘Look at today’s paper:  there’s four major stories on the front page and each one is about a merger or acquisition.’  I don’t anticipate being able to do that for a while, but even one story on the front page is helpful and encouraging!

As icing on the cake, Federal Reserve Board chairman Ben Bernanke yesterday said ‘I think there is a good chance the recession will end later this year…’

It was also refreshing to see another ‘back to the future’ headline in the Financial News‘Morgan Stanley tops M&A league table with Shering-Plough Deal’ which went on to explain that Morgan Stanley had finished fifth in the global league tables last year but is now in first place year-to-date.  Does this mark further return to normality in the markets?

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Impact of Sovereign Wealth Funds

Posted on Monday, 2 March 2009. Filed under: Commentary, Mergers |

There’s an excellent piece of research recently published on the impact of sovereign wealth funds on the companies (mainly in the West) in which they invest their money.  See a summary in the Financial Times HERE.  As an academic study, you can see the full report HERE.

Much of the report has to do with operational and finanical (including market) performance of companies in which the sovereign wealth funds have invested.  The report shows that target company performance improves after a fund has made its investment.  There are also significant corporate governance issues that are contrary to the conventional wisdom (especially the statements of many Western politicians):  apparently, the average investment of a sovereign wealth fund is 0.74% share ownership — clearly not a controlling interest! — with an investment of just over $46 million.  These are not what the popular press would have you believe.

Why is this of interest in M&A, as most of the investments are clearly not therefore for control of the companies in which they invest?  (And the study shows that in less than 0.5% of their investments are the sovereign wealth funds taking a 50% ownership position or greater.)  The interest lies in what impact these funds have on deals and where there is potential for an ultimate acquisition.

Anecdotally, it appears that M&A deals in certain areas with sovereign wealth funds behind them have caused problems:  the proposed purchase by DP World (controlled by the Dubai government) of P&O’s US business or when the Kuwait Investment Office in 1987 purchased 20% of British Petroleum (but was later forced to sell half it’s stake).  The Chinese oil company, CNOOC, ran into problems as well in 2005 when it tried to purchase the American oil company UNOCAL.

This study can therefore go a long way towards showing the supporting role that these funds can play — even if recognising that power could be exerted if they wished, albeit not in most cases through direct control because of a majority position.  Thus the above three examples should have been allowed, if you believe this study which is expertly documented.

Anything at this time to support the re-emergence of the M&A market is welcomed.  Just as basic funding and liquidity enables most companies to continue operating effectively (and the lack of liquidity being a major issue for many companies now), an effective M&A market is necessary for the health of the economy too, as it enables the strong to become stronger (up to the point where anti-monopoly issues would arise) and the weak to be taken over by the strong, and thus strengthened overall.  M&A done properly does result in 2 + 2 = 5.  These days, that can’t be bad.

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