The dangers of being acquired or merged
Beware the friendly equity investor and their offer. It is often fraught with danger. Sadly the management and staff of a business who are tasked with delivering post-acquisition or merger performance have little or no say in what happens. Their future is determined by invisible shareholder, often institutional investors whose motives are very different from the employees in the business.
The institutional investor will take a profit and move on – their loyalty is to their shareholders not your business so a good offer is a good offer – and once they have sold out and moved on what happens to the business they have just sold does not concern them unduly unless it looks like a good future investment.
The Potential Currys Takeover
The latest potential mega deal concerns electrical retailer Currys. This company is a well-known UK high street presence which consolidated previously independent brands Dixons, Carphone Warehouse and PC World. It now appears to be in the centre of an attempted takeover with two suitors, a US private equity investor firm Elliot and a Chinese e-commerce company JD.com who are thinking about it.
Currys is a typical UK plc subject to market forces so currently a bit in the doldrums as people cut back on spending in the wake of the travails of the UK economy. It has had to reduce some of its international operations and its value has slipped from a high of about £5 per share in 2015 to about 65p valuing the business at around £500m or so.
The shareholders of Currys must be pleased because the board is playing hardball and has already rejected an offer of £750m from Elliot and now another suitor has appeared.
Management and staff may be more worried.
The problem is that where takeovers by private capital are concerned they are mostly funded by debt which is promptly loaded on to the acquired business. Thus cash which was once available for growth and innovation is diverted into paying back loans and interest on the money used to buy the business.
Private Equity Takeovers and UK Retail Failures
In the UK retail sector tales of companies which were acquired by private equity and which subsequently failed are far from rare. Debenhams, Toys R Us, Maplin, HMV and Poundworld are all names which have disappeared from the high street and where private equity had a significant part in their downfall.
Clearly private equity investors don’t buy businesses in order to see them fail and, in other circumstances, an injection of new money and new management can bring about positive benefits. But all too often the mountain of debt which target companies have to service acts as a massive anchor on future growth. Debenhams, for example ended up with debt of around £1bn before it fell over which left it struggling in a fast moving and innovative retail market.
So Curry’s management and staff may well be rather more worried than the equity investors presently sitting on a tidy profit – watch this space. If it all goes badly there’ll be one less place to buy electricals.
Merger and Acquisition Failure Rates
The Havard Business Review estimates that between 70% and 90% of mergers and acquisitions fail.
This is quite a stunning statistic and one which would give CEOs pause for thought. The reasons are many and varied and have been well documented. Problems with lack of management commitment and post integration planning, merging different cultures and poor communication are all contributory factors.
Generally the bigger the parties involved the bigger the risk of failure. Trying to bring two massive organisations together is fraught with risk and demands often placed on the newly merged entity for quick wins can sometimes have an adverse effect.
We have already seen the effect of debt mountains on future performance but the problem associated with even friendly mergers can be just as problematic if largely unseen by anyone outside the organisation.
Often regulators get involved – the proposed merger between Sainsbury and ASDA was vetoed by the Competition and Markets Authority on competition grounds for example- and there is always the danger of a backlash from customers who may not want to deal with a changed business.
So beware the friendly equity investor and their offer. It is often fraught with danger!
John Taylor is an author for accountingcpd. To see his courses, click here.
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