Given the rising trend of companies combining forces to optimize scale, reduce tax and drive the output of complementary R&D resources, it is perhaps useful to explore some of the unintended results and increased opportunities of such moves for other suppliers.
The key issues with mega-mergers, apart from economic, have to be the impact on trading partners and also the political implications. Despite meticulous planning, because of competition legislation it is inevitable in most cases that the merger process will be delayed while the authorities explore the potential impact on markets.
For instance, according to Reuters, the Publicis-Omnicon merger, announced last July with the deal’s closing delayed at least six months because of regulatory issues, has already resulted in the loss of more than $1.5bn of client work and they face a fight to retain billions more, including a huge Samsung contract, just as the two advertising firms struggle to keep their merger on track. Client losses already include Microsoft, Danone, GSK, Sony, and Marks & Spencer.
Another consequence has to be the inevitable loss of talent, with the usual result of the best people finding it easier to move…
A little closer to home, the recently-announced agreement by Mondelez International and D.E Master Blenders to a mega-merger of their coffee units will create a new company that will be the world’s “leading pure-play coffee company”, with sales of around $7.3bn. The deal will see Mondelez’s wholly owned coffee portfolio (outside of France) being merged with D.E Master Blenders. Additionally, Acorn Holdings (the owner of D.E Master Blenders) will buy Mondelez’s coffee business in France.
The new firm will combine their complementary geographic footprints, portfolios of iconic brands and innovative technologies to release potential synergies, apart from fundamentally changing the make-up of the coffee category…
Another driver for mergers in the healthcare sector can be the high cost of innovation and late-stage failures in clinical trials, sometimes causing cashflow issues that can only be resolved by combining with stronger and ideally complementary competitors. This can result in the attendant government scrutiny of mergers such as Pfizer-AstraZeneca that can appear too big to be allowed to succeed…
Meanwhile, the German drug maker Bayer has just announced that it has agreed to acquire Merck’s consumer care business for $14.2bn, a deal that will make Bayer one of the world’s largest providers of over-the-counter products, with sales of consumer products exceeding over $7.6bn.
Bayer gains control of several well-known brand names, including Claritin, Coppertone and Dr. Scholl’s, resulting in fundamental changes to the categories involved, from both retailer and consumer points-of-view. Moreover, the strategic development of each brand will inevitably change to accommodate and reflect the new synergies…
Where such mergers are not possible, an alternative can be the emergence of private equity interest, resulting in their purchasing a significant share of a company and then making strategic disposals of parts of portfolio to release shareholder value, and ultimately sell or re-float the remaining company.
Meanwhile, the acquisition of US brand Urban Decay by L’Oreal enhanced the company’s Prestige portfolio.
Again, high US taxation is causing major American firms to combine foreign mergers with relocation of the combined headquarters to more benign tax environments, such as the Pfizer-AstraZeneca, Chiquita-Fyffes, and a host of other similar deals. The immediate consequence will obviously be the inevitable moves as the US authorities attempt to apply international pressure to frustrate or delay such potential losses of corporation tax, resulting in more delays.
Again the deal will result in the unintended consequence of good staff leaving to avoid career uncertainties in what is a short life, after all…
However, for those on the perimeters, opportunities abound… The mega-merger fall-out, combined with companies like Nestlé, Unilever and P&G redefining core-brand criteria and disposing of newly redundant parts of their portfolios, not only represent opportunities for other suppliers, but the resulting changes in brand-ownership can cause fundamental shifts in the competitive landscape.
In other words, given that a brand’s appeal, or otherwise, is often tied to the unique support system of its owner, a change in ownership can result in how that brand is perceived, relative to other players in the category… This changed perspective can not only result in a revival of the brand, but can also lead to a reinvigoration of a company making the acquisition.
Finally, apart from the new availability of good talent, such mergers and disposals will provide bargains in terms of brands that become a problem in terms of competition legislation, and a sell-off at any price becomes increasingly attractive…
Watch carefully…
