LONDON — Mergers and acquisitions have been much in the news in the last few weeks. These have raised some controversial issues. One of these concerns the role of private equity. Another is that of cross-border mergers.
The American private equity firm of KKR recently teamed up with the deputy chairman of Alliance Boots, a major British chain of retail pharmacies, to launch a takeover bid for the company. Questions have been asked about possible conflicts of interest on the part of the deputy chairman, who stands to gain hugely from the deal.
There are also concerns about the effect that the takeover will have on the company’s pension scheme, which may not be adequately funded and protected. The unions have expressed fears about likely job losses. It is widely believed that the aim of the takeover is to capitalize on the value of the chain’s many retail properties at a time of a boom in commercial property and to gear up the business. It may then be re-floated on the stock market giving its new owners hefty profits.
Do such mergers benefit anyone except the financiers? It may be argued that the management had not taken full advantage of the opportunities for expansion and that newly honed management skills are needed. It may also be that the firm could benefit from expert financial engineering. Perhaps, too, the increasingly competitive environment in British retailing coming from the development of pharmacies in supermarkets requires a tougher response from the company. But how far will customers and employees benefit? Time alone will tell. In the meantime employees and pensioners may feel a harsh wind.
Cross-border issues are raised by another projected merger and acquisition in banking and finance. ABN AMRO, one of the largest Dutch banks, has not performed particularly well in recent years, but it has a number of important assets not only in the Netherlands, but also in the rest of Europe and in the United States. It was approached by Barclays, one of the larger British banks, and terms for a merger involving the moving of Barclays head office from London to Amsterdam were apparently agreed.
A key feature of the deal was the sale of ABN AMRO’s La Salle Bank in Chicago to Bank of America. The setting up of this deal and the sale of La Salle Bank roused strong objections among ABN AMRO’s shareholders, who thought that negotiations had been too cozy and that a better price for their shares could be found.
Their opposition was encouraged by the decision of RBS (Royal Bank of Scotland), which a few years ago took over National Westminster Bank in Britain, in conjunction with two European banks, to make a bid for ABN AMRO. RBS was reputedly particularly keen to buy La Salle Bank and did not want this to fall into the hands of Bank of America. Barclays and ABN AMRO let it be known that in merging their operations there would be job losses at both banks. Moreover some call centers would be relocated to countries where wages are lower, thus reducing overheads and leading to greater shareholder profits.
The fight for ABN AMRO is much bigger than the takeover of Alliance Boots and raises more issues than that of redundancies and pensions liabilities. There is an important regulatory issue. Which authority should have primary authority to regulate the merged bank — the Financial Services Authority in Britain or the Netherlands Banking supervisor? Will the merged bank reduce banking competition in Europe? Will one of the benefits from the merger be a reduction in the costs of cross-border payments that remain high within Europe despite the development of the single European market? Progress in creating a single market in services including financial transactions has been slow.
Whatever the outcome, one thing is certain: The financial advisers and the lawyers stand to gain millions of dollars in commissions and advisory fees. Will the customers, employees and pensioners of the banks involved benefit? Will shareholders see a higher share price and increased dividends or will they find returns reduced as a result of over-expansion by ambitious managers?
KKR has also been active in Japan and there have been a significant number of cross-border mergers as well as of acquisitions by Japanese companies of other Japanese companies. There have even been some hostile takeovers and some Japanese companies have been scrambling to develop “poison pill” defenses to ward off hostile takeovers. The government has also raised Japan’s defenses against takeovers by expanding the sectors protected from foreign buyouts.
In the past shareholders were very much treated in Japan as “also-rans” whose interests were best served by an inexorable rise in stock-market prices. The bursting of the bubble ended the bonanza and shareholders, many of whom are retired on limited pensions, have understandably demanded increased dividends. Companies have been forced to pay more attention to these stakeholders.
The old consensus between management and workers with a nod to shareholders cannot be revived, but shareholders and managers and companies launching takeover bids need to recognize that companies will only do well if they have a generally contented workforce.
Mergers and acquisitions, including those crossing borders, can lead to improvements in competitiveness and efficiency beneficial to all the stakeholders, but acquirers and managers need long-term thinking, which means taking due account of the interests of customers and employees. Asset stripping and short-term thinking may lead to fat profits for acquirers for a time, but are not in the long-term interests of companies, their customers and their employees. “Poison pills” and regulatory protection from foreign buyouts may also damage a company’s ability to grow and compete.
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