Euphoria apart, the merger is half-baked
For the merger to succeed, it must increase shareholder value faster than if the companies were separate.
By Manika Gupta, INDIATIMES NEWS NETWORK |
The Mittal-Arcelor deal which ended in a merger had started originally as a hostile takeover bid. Usually mergers occur in a friendly setting where executives from the two companies participate in a due-diligence process to ensure a successful combination of all parts, but the Arcelor-Mittal merger happened only after a long struggle by Laxmi Mittal to take over the second biggest steel company.
There were many mergers between 2005 and 2006. These included: Kmart with Sears, Roebuck costing $11billion; Proctor and Gamble buying out Gillette at $54 billion; Macromedia Inc with Adobe Systems Inc., at $3.4 billion. The mergers that happened in the last five months include: Walt Disney company buying out Pixar for $7 billion. Most of these were examples of due diligence, but in case of Arcelor-Mittal, the last five months were a continuous battle.
The bid stirred up passions amongst politicians, other leaders, and common man. With the European Commission being accused of protectionism and racism, Arcelor's CEO, Guy Dolle, offered a laundry list of ills in Mittal Steel because of which the merger should not take place.
Also potentially standing in the way of the merger was the European Commission, which has blocked many a deal, the most famous one being General Electric's $43 billion acquisition of Honeywell--even though it had been approved in the United States.
It may be recalled that Dolle said that Mittal Steel lacked strong corporate governance practices. He even went on to compare Arcelor with parfum and Mittal Steel with eau de cologne (which of course was clarified later)
Dolle said that the two companies had a different work culture and were not compatible.
He said that while Mittal Steel was into producing volumes, they did a lot of value addition, so the synergy was not possible.
According to nay-sayers this was not the best of starts for a merger where the two companies come together to achieve economies of scale, synergy and increased market-share, even though they are pointing exactly what would happen if the Arcelor-Mittal deal were to fall apart; few mergers of this magnitude have ever failed so late in the process.
There were many mergers between 2005 and 2006. These included: Kmart with Sears, Roebuck costing $11billion; Proctor and Gamble buying out Gillette at $54 billion; Macromedia Inc with Adobe Systems Inc., at $3.4 billion. The mergers that happened in the last five months include: Walt Disney company buying out Pixar for $7 billion. Most of these were examples of due diligence, but in case of Arcelor-Mittal, the last five months were a continuous battle.
The bid stirred up passions amongst politicians, other leaders, and common man. With the European Commission being accused of protectionism and racism, Arcelor's CEO, Guy Dolle, offered a laundry list of ills in Mittal Steel because of which the merger should not take place.
Also potentially standing in the way of the merger was the European Commission, which has blocked many a deal, the most famous one being General Electric's $43 billion acquisition of Honeywell--even though it had been approved in the United States.
It may be recalled that Dolle said that Mittal Steel lacked strong corporate governance practices. He even went on to compare Arcelor with parfum and Mittal Steel with eau de cologne (which of course was clarified later)
Dolle said that the two companies had a different work culture and were not compatible.
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He said that while Mittal Steel was into producing volumes, they did a lot of value addition, so the synergy was not possible.
According to nay-sayers this was not the best of starts for a merger where the two companies come together to achieve economies of scale, synergy and increased market-share, even though they are pointing exactly what would happen if the Arcelor-Mittal deal were to fall apart; few mergers of this magnitude have ever failed so late in the process.
However, the completion of a merger does not ensure the success of the resulting organization; indeed, many mergers result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities at one of the partners.
Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture.
These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.
Historically, mega mergers have often failed to add significantly to the value of the acquiring firm's shares. Corporate mergers may be aimed at reducing market competition, cutting costs, reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may not be consistent with public policy or public welfare.
With the merger having taken place there's sort of a dark cloud that follows and that is the executives who were against the deal may be phased out or face a lot of scrutiny.
Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture.
These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.
Historically, mega mergers have often failed to add significantly to the value of the acquiring firm's shares. Corporate mergers may be aimed at reducing market competition, cutting costs, reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may not be consistent with public policy or public welfare.
With the merger having taken place there's sort of a dark cloud that follows and that is the executives who were against the deal may be phased out or face a lot of scrutiny.
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