Managing change in EU cross-border mergers and acquisitions
The European Foundation for the Improvement of Living and Working Conditions organised a company network seminar on November 29–30, 2007, hosted by Santander at its corporate headquarters in Madrid, Spain. In intensive discussions over the two days, 32 representatives from companies, trade unions, universities, research organisations and the European Commission discussed the management of change in EU cross-border mergers and acquisitions (M& A). The context was set by a presentation from Roderick Meiklejohn from the European Commission’s Directorate General of Economics and Finance, giving the latest evidence of trends in M&A in Europe. This was followed by detailed presentations of their M&A strategies by representatives of Air France / KLM (France, Netherlands), Impress (Netherlands, UK), Danske Bank / National Irish Bank (Denmark, Ireland), Schneider Electric (France) and Santander /Abbey (Spain, UK)
The representative from European Commission set the scene for the seminar by outlining the Commission’s interest in the topic: so long as they do not inhibit competition, it is felt that mergers and acquisitions (M&A) can – if well planned and implemented – benefit European consumers by bringing efficiency gains. Attention was also drawn to the limitations of the data sources on M&A operations. Although rigorously compiled by scanning financial newspapers all over the world, the data are not derived from administrative sources, with the exception of Securities and Exchange Commission (SEC) filings in the US, and therefore underestimate small cases of M&A. Nevertheless, they give a useful global overview of M&A activities.
Worldwide, there was a steady growth in M&A from 1992 to a peak in 2000, followed by a sharp fall, which bottomed out in 2002–2003 to reach a new high in 2006. Although in that year the number of cases of M&A was almost as high as in 2000, the value of these deals in billions of euro was considerably less, suggesting that the recent surge in M&A activity is not a repeat of the ‘bubble’ of the late 1990s but rather is based on a more realistic valuation of the assets of the target companies (see Figure 1). A comparison between the two periods shows the growing importance of Asian companies as targets for M&A. Most instances of M&A still take place within national borders, with 80% of intra-EU deals accounted for by domestic deals. Companies in new Member States (NMS) attract few US bidders but remain popular targets for EU companies – although not at the high levels reached in the 1990s. Manufacturing accounts for a higher share of cross-border M&A activity than services. This is linked to a trend whereby acquisitions of service companies tend to be in nearby countries, whereas the relative propensity to take over manufacturing companies increases with distance. Thus, EU acquisitions in Asia involve mainly firms involved in industrial production.
Figure 1: Worldwide mergers and acquisitions
Source: European Commission calculations from Thomson Financial Services data
Motivations for M&A include:
- access to economies of scale and scope;
- market power;
- access to new markets;
- access to inputs, including labour as well as raw materials and technologies;
- complementarity of products;
- empire-building by CEOs.
In general, the increases in efficiency resulting from mergers bring price reductions, which benefit consumers. However mergers and acquisitions that are driven by the quest for market power may have adverse effects: eliminating rivals in the market may reduce competitiveness, enabling companies to increase their prices and producing perverse effects whereby profitability may grow even in a context of shrinking sales, declining outputs and layoffs of workers. Such effects are detrimental to the interests both of consumers and employees. Pre-emptive acquisitions may also produce negative effects. Furthermore, M&A entails considerable risks to companies. It is estimated that at least 50% of mergers are unprofitable. Common problems include overvaluing or under-estimating indebtedness, overestimating management capabilities, inability to manage change, and difficulties in integrating different corporate and national cultures.
Some concern was expressed by seminar participants about the growing role of private equity and hedge funds in M&A. It was reported that these developments are being watched closely by the European Commission, as they are by Member States and the various regulatory authorities. So far, there does not appear to be sufficient evidence to justify panic measures.
Case study 1: Air France-KLM, France/Netherlands
The Air France-KLM (pdf 90kb) merger represents a strategic union between two major European airlines with strong complementarities in their assets, including two of the most important world hubs: the airports of Paris-Charles de Gaulle in France and Amsterdam-Schiphol in the Netherlands. The merger has given Air France-KLM a strategic advantage in the highly competitive global airline industry, and it now ranks first in the world for business volume, second in the world for the numbers of passengers carried and second in the world for the numbers of international passengers carried.
Case study 2: Impress, Netherlands/UK
Impress (pdf 79kb) is a world-wide provider of speciality and food cans operating in 21 countries. Impress aims to be the best metal can manufacturing company in the world and its acquisitions policy is driven by this strategic goal. Companies are acquired only if they can add value to Impress by giving it access to new technologies, by adding diversity to the company’s product portfolio or by enabling it to enter new markets.
Case study 3: Danske Bank–National Irish Bank, Denmark/Ireland
Danske Bank (pdf 84kb) is a Danish bank with retail banking services and holdings in Ireland, Denmark, Sweden, Finland and the Baltic States. After deciding to expand geographically beyond its original Nordic base, in 2005 it took over the ailing National Irish Bank (previously owned by National Australia Bank). Danske Bank attributes much of its success in this takeover to its multi-stakeholder approach and its serious and open engagement with the trade unions.
Case study 4: Schneider Electric, France/USA
Schneider Electric (pdf 83kb) is the number one worldwide provider of electrical distribution and the number two worldwide provider of automation and control systems. Over the last five years, 50% of the company’s growth has come from acquisitions, which therefore play an extremely important role in its strategy. Schneider Electric acquires companies only where it is clear the acquisition would enable the company to expand its geographical presence, develop new growth platforms, find new solutions to current energy problems or provide access to innovation, research and development.
Case study 5: Santander–Abbey, Spain/UK
Santander (pdf 80kb) is major global bank with operations in Latin America, Spain, Norway, Italy, Germany, Portugal, the United Kingdom and a number of other European countries. The collaborative, multi-stakeholder approach adopted by Santander in its acquisition of Abbey has been vital for its success – both in weathering the difficult change processes that Abbey’s management and employees have undergone and in achieving its strategic goals. Moreover, the strength of Santander’s balance sheet stabilised Abbey, giving it a solid foundation for the future.
Guidelines for successful M&A
Group discussions at the seminar revealed a surprising degree of unanimity about the most important success factors in M&A.
Ensure M&A meets strategic goals
All speakers agreed that buying ‘for the sake of buying’ or ‘because the company is there’ is a recipe for failure. It is essential to ensure that M&A clearly meets the strategic corporate goals. In the Air France-KLM case, there was a strong complementarity between the two airlines in terms of their routes, hubs and customer bases. In the Impress case, the dominant motive was to gain access to important technological capabilities and to be able to supply key customers who were dependent on these technologies, in keeping with the company’s strategic goal of seeking excellence. In the case of Danske Bank, the strategic goal was geographical expansion beyond the company’s traditional Nordic base. For Schneider Electric, M&A is a key component of its growth strategy.
Carry out background research
Common to all five cases was a commitment to carrying out detailed background research before making an offer, so going beyond normal due diligence. In the case of Schneider Electric, this took the form of a systematic screening exercise. At Impress, investigations were carried out into the local reputation of the company, its culture and the capabilities and attitudes of its management team. Danske Bank involved its HR department in exploring staff relations at National Irish Bank as part of the due diligence procedure.
Another theme that emerged from all the presentations was the importance of an honest approach to the target company, in which the bidding company is clear about its intentions, notifying the target company of its intentions and informing management, shareholders and other stakeholders at the earliest possible opportunity. Transparency is a crucial precondition for establishing a relationship of trust. This is particularly important in situations such as that of National Irish Bank, where the workforce was concerned that the purchaser, in search of a quick profit, would seize the Bank’s assets and not put the needs of workers and customers first.
Involve all stakeholders
By ensuring that all stakeholders are kept fully informed at all stages, a constructive atmosphere can be maintained. Stakeholders in this context means shareholders, employees, trade union representatives and managers from target companies as well as from relevant functional departments in the acquiring company. When stakeholders know that their views are listened to seriously, this generates a willingness to compromise and cooperate and contributes to the development of a consensual transition plan. Santander, Danske Bank, Impress and Air France all consulted intensively with trade unions representing employees in the target companies.
Hit the ground running
Several speakers emphasised the importance of announcing changes clearly from the outset and hitting the ground running the day after an acquisition deal is signed. Impress, for instance, makes sure that its logo and signage is substituted for that of the target company on the first day of the new regime. Schneider Electric insists that staff in the target company are connected to the parent company’s email system from the first day of the new regime. Santander, too, made speed an important priority in its union with Abbey, adopting a task force approach in setting up a dedicated team to manage the takeover and setting a strict timetable for the changeover processes.
Listen and learn
Another striking common theme in all the presentations was the importance of ‘listening and learning’ in the acquisition process. Impress and Danske Bank both emphasised the importance of listening to the views of employees, managers and shareholders in the target company and ensuring that they were taken into account in any restructuring plans.
Respect cultural differences
Closely linked with the principle of listening and learning is the principle of respect for cultural differences. Air France invested considerable efforts in ensuring that the French and Dutch employees of the two airlines developed a common understanding, using exchange visits, managerial placements and training (including English language training) to encourage good communication. Schneider Electric has developed an internal mobility programme throughout the group in order to increase understanding between its different acquisitions and help build a common corporate culture.
Speakers emphasised the importance of keeping the original goal in mind throughout the acquisition process and avoiding being sidetracked into following other, tangential objectives. Santander set specific targets in its 100-day transitional plan to monitor progress towards its original aims. Representatives from Air France, Impress and Danske Bank also emphasised the importance of maintaining a focus on strategic goals when deciding on how to restructure their new acquisitions.
Keep communications open
Finally, all five companies stressed the importance of good communications with all stakeholders for successful M&A. representatives of Air France and Danske Bank expressed their conviction that an important ingredient of the success of the company’s acquisitions lay in its willingness to communicate openly with employees and trade unions at all times and to allow time for the information conveyed to sink in.