Like inflation and earnings per share enhancement, mergers of equals are back from the dead. Recent deals presented under this label include Alcatel-Lucent, Suez-Gaz de France, Alliance Unichem-Boots, New York Stock Exchange-Euronext and Abertis-Autostrada. The traditional view of capital markets was that mergers of equals were disguised takeovers. Presenting deals as “pooling of interests” had two merits. It protected egos and in the US, until 1999, avoided goodwill amortisation, which dented reported earnings. A superficial solution to two superficial problems, then, but one that was surprisingly popular. In 1998 mergers of equals represented 17 per cent of global deal volumes, according to Dealogic.
It is still right to be sceptical. Few today refer to AOL Time Warner or Morgan Stanley Dean Witter. Europe’s largest car maker is still called DaimlerChrysler, but its former chairman, Jürgen Schrempp, has subsequently said the deal’s presentation partly reflected “psychological” factors. Mergers of equals have recovered to account for 7 per cent of global deal volumes so far in 2006. But their inequality looks enduring. Of the 10 biggest combinations announced since 2004, nine are identifiably takeovers. The exception is Alcatel-Lucent. The French company will contribute 60 per cent of the combined entity’s equity but the board and two senior management posts are equally split.
Should shareholders care? Mergers of equals can lead to dysfunctional office politics, but straight takeovers often do too. The key risk is that the managers of the target accept a lower premium to protect their own positions. American academic Julie Wulf has found some statistical evidence that this may be the case. Still, with the important caveat that negotiators must extract potential partners’ best offers, shareholders should not be dogmatic. If their share of a merger’s synergies is worth more than the premium an outright purchaser might offer, they should accept the deal – whatever it is called.
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