Tony Jackson: Transatlantic lessons to be learned
By Tony Jackson
Published: February 12 2007 17:08 | Last updated: February 12 2007 17:08
In one of the first pieces I wrote as a financial journalist some 25 years ago, I wondered why UK takeovers of US companies so often proved disastrous. Of the many examples to prove the point, the most obvious – the grand turkey, as it were – was Midland Bank’s purchase of Crocker Bank in 1980.
Mainly because of that deal, Midland was eventually taken over by another UK bank, HSBC. So there was a certain glum inevitability to HSBC’s first ever profits warning last week. The cause – its $14.7bn takeover of another US bank, Household International, four years ago.
Last week also brought news of Imperial Tobacco of the UK making its first foray into the US cigarette market with the $1.9bn purchase of Commonwealth Brands. These days, Imperial is a very well managed company. Fingers crossed, though – in its old conglomerate days it brought off another outstanding turkey in buying the US motel chain Howard Johnson.
All this raises two questions. Are UK companies particularly bad at foreign acquisitions? And are US companies riskier to acquire?
The answer to the first is a clear no. Think of Thomson of France buying General Electric’s TV manufacturing business in the US only to close it down. Think of Mitsubishi Estate buying the Rockefeller Plaza and putting it into Chapter 11 six years later. Think of Daimler buying Chrysler.
The second question is trickier. While there have been some very successful foreign acquisitions of US companies, the US is a harder place to make money than it looks. And US managers are generally pretty smart. When buying into the US, the question too seldom asked is why the other guy is selling. All this is has a wider relevance. Last year, according to Dealogic, cross-border M&A worldwide was a record $1.3 trillion. One third of that was either into the US or the UK, with the US slightly in the lead.
No doubt, as the investment bankers tell us, there is a trend towards global consolidation. And many of the countries doing the consolidating – China and India, for instance – are coming to it fresh. Hence the value of the American example. If we want an extended history of how and how not to do it, the US is the place to look.
Sticking with UK/US deals for the sake of simplicity, think of some big ones over the past decade. In 1998, Scottish Power paid $10.4bn for Pacificorp, and sold it at a loss to Warren Buffett six years later. The following year Vodafone bought the Californian mobile operator AirTouch for $61.2bn – a price which, to put it politely, reflected the temper of the times. In the same year, Marconi of the UK effectively destroyed itself by paying $5.5bn for US telecom equipment companies.
And so on. But before we depress ourselves too much, consider the successes. It was in 1998 that BP bought Amoco, followed by Atlantic Richfield the next year. Right now, some of those US operations are – shall we say – challenging. But no-one has accused BP of overpaying. Again, Unilever knew what it was doing with its $24.2bn purchase of Bestfoods in 2000. So, a few years earlier, did Cadbury Schweppes with Dr Pepper, and again with the Adams confectionery business bought from Pfizer for $4.25bn in 2002. Both companies, please note, had been operating in the US market for many decades.
Conversely, of course, most of the turkeys involved companies plunging heavily into the US market without prior experience. The argument is, no doubt, that a big opportunity requires a big deal. That particular fallacy wants watching as emerging nations muscle into the developed world, and vice versa.
Vodafone has just confirmed the $18.8bn purchase of Hutchison Essar, its big first-time splash in India. Vodafone described the deal as “transformational”. And that is just the point. Transformation– the waving of a magic wand – is a lot more appealing than patient groundwork.
The UK supermarket giant Tesco has raised eyebrows lately for its plans in California. It is building a business from scratch, under its own brand name. But UK retailers, critics say, have a lousy record in the US. Indeed they have, precisely because they went in by acquisition – J Sainsbury with Shaw’s supermarkets in New England, Marks & Spencer with Brooks Bros. and King’s supermarkets. Tesco is doing it the slow, persevering way. All those trigger-happy Chinese and Indian acquirers should take careful note.
When investing always start with an assumption that the stock market is dead wrong.
