The doublespeak of corporate takeovers

Angus McCrone By Angus McCrone, The CA magazine

5 June 2015

Acquisitive companies go big on premium and synergy at the expense of elegance – and their staff – argues Angus McCrone.

English may be the lingua franca of international business, but unfortunately the version used is not the elegant prose of Edward Gibbon or George Orwell. As far as I know, the latter, sitting on the island of Jura in the late 1940s, never typed out "geographies", "market penetration" or "going forward".

Or indeed "synergies", a word that has become indispensable currency in the realm of takeovers in recent times. A couple of decades ago, companies talked of "synergy" – an inflated claim about the benefits the merger of two companies would bring, but perhaps excusable hyperbole. Now, they have gone a step further and invented a plural for that word, as a euphemism for cost-cutting and job losses.

"Synergies" are liberally sprinkled through 2015's crop of multibillion pound takeovers on the London stock market. A cynic would say that they need to be, because the bidders need to have some justification for the fat premiums they are paying compared to target company share prices.

At a premium

Take US drinks can manufacturer Ball Corporation, which made an agreed £4.3bn offer for its UK-based rival Rexam back in February. The bid was at a 40 per cent premium to Rexam's pre-bid stock price.

The bid documents made great play of a promise to "achieve net annual cost synergies of approximately $300m in the third financial year of operations of the combined group".

The supporting list included lower general and administrative expenses (44 per cent of the total), optimising global sourcing via standardisation and greater purchase volume for direct and indirect materials (in other words, squeezing the supply chain, 32 per cent of the total), lower freight, logistics and warehousing costs (22 per cent) and sharing best practices to lower production costs (2 per cent).

In the case of Shell's £47bn agreed offer for BG Group, unveiled in early April, the premium to the prior share price of the target was even higher than that for Rexam, at 50 per cent. The statement said that Shell "expects the combination to generate pre-tax synergies of approximately £2.5bn per annum", consisting of $1bn of operating cost savings and a $1.5bn reduction in exploration expenditure.

Integration costs

The detail of the first of those big numbers showed cost savings of "$870m from the de-duplication of overlapping back office and business support functions, the elimination of overlapping support costs, office consolidation, the migration of BG onto Shell IT systems, and removal of duplicative corporate costs", plus savings on procurement spending of $90m and on marketing and shipping costs of $50m, and $140m in "economies of scale in addressable operating, capital and raw material cost areas".

These promised fruits of the modern mega-merger come at a cost – the Rexam bid cited non-recurring integration costs of $300m, while the BG bid mentioned one-off costs of $980m.

Fruits can fill with juice, or they can shrivel. Both the Ball-Rexam and Shell-BG proposals could be vulnerable to the attentions of competition authorities, in the former case over the production of drink cans and in the latter case, liquefied natural gas.

The merger fruits were also subject to other risks: the Ball-Rexam documentation talked of customers who are turning toward self-supply and to other materials such as PET (polyethylene terephthalate) and glass, while the Shell-BG material admitted that much of the medium-term outlook depended on oil prices returning to "Shell's long-term planning range of $70-$90-$110 per barrel".

The two bids also shared other characteristics of wider significance. The high premiums on offer were consistent with the idea that modern-day acquirers are more reluctant to go hostile with their takeover bids than those in previous decades, making them more exposed to hard bargaining on price from the target company management. That makes identifying "synergies" vital to the economic case.

If they proceed, both will result in the disappearance of important UK-listed companies. The UK's open door to takeovers has seen many of its prominent companies of 25 years ago disappear – from ICI to Cadbury, Pilkington to Hanson, Scottish & Newcastle to P&O.

In the Rexam deal, public concern focused on the future of the UK firm's research centre at Milton Keynes. But there was also the certainty of the loss of head office skilled employment and associated services. As the statement puts it: "Ball does intend to operate one head office for the combined group based in Colorado."

Angus McCrone is a freelance business journalist. This article first appeared in The CA magazine June 2015.


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