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 Deals of the day-Mergers and acquisitions 15 April 2017

Lessons from the Bharti-MTN talks failure
October, 05th 2009

This is a subject one did not intend to return to in a hurry, but the collapse of the Bharti-MTN mega-deal invites me to do so. Not because I feel vindicated in my opposition to this flawed deal, but because its fortuitous failure is not likely to cool the corporate ardour for more mergers and acquisitions (M&A).

Bharti insiders are already said to be talking of another acquisition as substitute for MTN. But mergers on the rebound are unlikely to work any better than first-love ones.The fact that the markets are celebrating the demise of the Bharti-MTN overtures --- in South Africa and in India --- means everyone knew the deal was big trouble.

Both companies would have spent years adjusting to each other, wasting precious time and money in being inwardly-focused when they should have been talking customer benefits. If this much is clear, why are CEOs so gung-ho about growth through M&A? Why are corporate boards still backing their CEOs when they know the chances of success are one in three at best?

There are several answers for this. One is hubris and the pursuit of more. Given a choice between bigger and better, most CEOs prefer the former. In the short run, size brings you more airtime on TV and column centimetres in newspapers than mere excellence. All CEOs calculate that if, in the long run, we are all dead, it makes better sense to garner the glory now and leave the job of cleaning up the mess to someone else. This is one reason Jim Collins, author of Good to Great, calls for Level Five leadership in companies.

Among other things, a Level Five leader puts the company's interests above his own need for glory. When it's the reverse, companies cannot progress from good to great.
Look at Jack Welch. A great leader, but he became larger than GE. His successor is still struggling to fill his shoes and make GE a more manageable company.

The second reason CEOs make errors in M&A judgments is the stock market.
Big investors, investment bankers and promoters with less than an owner's stake in companies tend to benefit from merger moves and short-term stock price spikes. Mergers, by their very nature, cause stock prices to rise (or fall) as expectations change. Investment bankers have big fees to earn, and so they have a bigger interest in getting a deal through than in making it work. Like matchmakers, they do the easy part, and leave the tough job of making the marriage work to the hapless couple.

Significant investors and stock analysts tend to like M&As because they can make a quick buck when the market prices of the companies involved move. Since CEOs spend an enormous amount of time fretting about share prices, they tend to pay a lot of attention to what the market is saying. In the run-up to the Bharti-MTN mating dance, the markets were saying Bharti was already the biggest player in India, and it had less room to grow. Translated, this meant 'look for inorganic growth through M&A'. It's a load of bull, for growth comes not only from a horizontal expansion of a brand's franchise, but from deepening it, selling more and deeper to existing customers.

If most M&As are conceived in the sin of hubris, the moot point is this: are there circumstances in which mergers can be made to work? Sure. There are three questions CEOs, or acquirers (or for that matter, those being acquired) should ask themselves before they jump into bed with prospective mates. One, will the customer benefit? Two, am I acquiring just an asset or an entire culture? Three, what is the true cost of this merger?

If the focus is on the customer, you can seldom go wrong, for the merger talks would revolve around what we can sell to her; how both companies will provide new and better services; and what each company brings to the table to provide these services. This is what will decide valuations and merger terms.

The second point is equally important. If you are just acquiring an asset --- like Marico purchasing a Mediker brand, or Tata buying Nissan's assembly line for use in India --- that's fine. But in most mergers, you get not only the assets, but people --- and an entire culture. Most mergers fail because companies come with different people cultures, and it takes a lot of effort to make them work together. It would never have been easy to get MTN's African employees to work easily with Bharti's Indian ones, with all the inbuilt racial biases.

The last point, the true cost of a merger, is not the price paid to shareholders of the other company. That itself may be overvalued, but the real cost is the opportunity missed. If Bharti was planning to pay $14 billion in cash and shares to buy MTN, the question it should have asked itself was: could I have used the money to grow my business by the same amount in a different way? Mergers make sense only when the answer to this is no.

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