BHP Billiton’s inability to seal a $39bn takeover of PotashCorp of Saskatchewan has sent a warning to chief executives worldwide about the risks of attempting large, cross-border deals. The Anglo-Australian miner has now failed to complete three major transactions in as many years, leaving investors questioning whether such mega-mergers are a dying breed.
Blocking these types of deals is nothing new. Back in 2000, at the peak of the technology, media and telecoms boom, Mario Monti, the EU’s antitrust enforcer, said he was “profoundly troubled” by the risks of market domination posed by proposed mega-mergers. More recently, the French government favoured the acquisition of Suez by Gaz de France, to stop the utility being bought by Italy’s Enel, while the Spanish government blocked the acquisition of Endesa, the electricity group, by Eon of Germany.
One reason why many of these deals are struggling to reach completion is the rise of resource nationalism, as countries rich in oil, gas and other natural resources look to boost their share of profits, potentially constraining supply. A recent report by the Organisation for Economic Co-operation and Development said Australia was right to propose a mining profit tax, while China is planning to extend a tax on oil, gas and coal output from one province to the entire nation.
Another reason is customer influence, for which investors should read: China. Witness the events of last year when Chinalco, the state-backed aluminium company, teamed up with Alcoa to buy 18 per cent of Rio Tinto for $19.5bn. Steelmakers feared the investment would mean Rio Tinto had a near-monopoly in iron ore and would wield influence over pricing and strategy. In the end, the deal collapsed after investors protested at not being given the chance to participate in the capital raising that accompanies the deal.
These issues are making chief executives of multinational companies think twice about pursuing corporate bulk for bulk’s sake. The trouble is that most of them still hold on to the age-old belief that bigger is better. Large-scale mergers, the traditional argument goes, reduce excess capacity, improve efficiency and boost pricing power.
Indeed, such thinking fuelled the spate of 1990s oil mergers that spawned today’s supermajors such as ExxonMobil and ChevronTexaco. As with the world’s biggest miners, many of the supermajors have reached the point of diseconomies of scale and grown significantly bigger than their available investment opportunities. In other words, becoming bigger via acquisition will no longer resolve the real issue, resource access, and can make it even more difficult to find enough new reserves to replace those used each year.
But the trouble for big companies is that they need to strike bigger and bigger deals to make any real difference to their top line. Just look at PotashCorp. The group is the world’s biggest fertiliser producer but it accounted for just 15 per cent of BHP’s market cap, which technically counts as nothing but a “bolt-on” acquisition, yet the deal was still blocked.
The obvious way to appease regulators is to divest of certain assets – but that can be counterproductive as companies then run the risk of losing more value through sales than they would gain through a large-scale acquisition itself.
Back in 2001, when the EU’s antitrust regulators blocked General Electric’s $45bn attempted takeover of Honeywell International, executives offered to divest of Honeywell businesses that generated $2.2bn in annual revenue to get the deal through. At the time, merger experts for the European Commission, the EU’s executive body, wanted them to dispose of $6bn in assets – and that was a price the companies considered just too exorbitant.
Clearly, regulatory and government sensitivities to large-scale cross-border deals are heightened during economic recessions, when growth is weak and unemployment high. Chief executives typically justify the high premiums they pay on big takeovers by talking up the synergies they can achieve, and that almost always means job cuts.
History has shown, time and time again, that chief executives are overconfident about the savings that a mega-merger might generate, as well as underestimating the potential for culture clashes, or the ease with which systems can be integrated in a cross-border deal.
However, some major international transactions are still going through. Over the summer, for instance, Bharti Airtel, India’s largest mobile telecommunications operator, completed its $10.7bn acquisition of Zain Africa, the African operations of Zain, the Kuwaiti state telecoms company – so far, the largest cross-border deal in the emerging world this year. Also in August, GDF Suez, Europe’s second-largest utility, managed to take control of International Power in a deal to create a global company with combined annual revenue of €84bn ($114bn).
Some chief executives with big ambitions to grow their companies via acquisitions in new markets will hope to find it easier when markets recover and sentiments change. But government intervention on cross-border mega-mergers is unlikely to disappear completely, which means mergers and acquisitions going forward will need to be driven by strategy rather than scale. And that can only be a good thing.