Situated right next to Wilmslow train station is the headquarters of Norcros, a leading bathroom products supplier.
Norcros is a conglomerate of businesses involved in bathroom fittings from taps and tiles to complete shower units. The company has just spent nearly £22m in acquiring another business, Croydex, that makes complementary products such as shower rails and bathroom cabinets.
What is happening in the world of bathroom accessories in Wilmslow is a microcosm of developments in global stockmarkets. Growth in merger and acquisition activity has been explosive with total global merger activity expected to reach $4 trillion US dollars this year, a level last seen before the credit crisis.
Why is this happening and why now?
This is happening firstly because interest rates are low making borrowing cheap, and secondly because companies are under pressure from investors to do something with the cash piles many have accumulated.
‘Why now?’ is a more interesting question. Given the strategic sense of most of these deals, why didn’t they happen when prices were lower?
If you or I walk past a shop that sells something we like and it has a 30% off sale, we would probably go in and buy. However, this does not happen in the stockmarket. High ‘animal spirits’ (as economist John Maynard Keynes called them) are needed to catalyse this activity and such positive emotions are in short supply during times of falling markets.
You can see this in the figures - global merger activity consisted of 1,033 deals with a total value of $4.2 trillion in 2007 but this fell to 595 deals worth £2.7 trillion in 2008 and then declined to 385 deals valued at $1.9 trillion in 2009. What is striking is that most stockmarkets fell 30% over that time – the sale was on and yet the buyers were increasingly staying away.
To give a current example, the recent bid approaches by two large US companies for the country oven manufacturer Aga Rangemaster were around 185p per share. Back in January 2009, the shares were 60p – where were the bids then?
Indeed, if anything, we should be a little concerned about the current heightened level of activity because previous peaks have invariably been followed by bear markets. Corporations seem to not only miss the bottom but have an uncanny knack of buying near the top.
Fully Paid Up
Why is this so troubling?
The problem is that the average takeover destroys value. Many studies looking back over decades of corporate activity have shown that most takeovers result in value destruction, usually because the bidder overpays.
The bidding company management often becomes so enthusiastic about acquiring the new business that financial prudence goes out the window. Look for overconfidence and hubris at Board level and you will generally find a trail of deals that have failed to add value.
One of the largest bids in corporate history was by Vodafone for a German mobile phone network, Mannesmann. The announcement of the deal stated, “The merger of Vodafone and Mannesmann is a combination of two highly successful companies and management teams…”
Size is Everything
Of course, there are exceptions to the rule. A recent study called “Do Shareholders of Acquiring Firms Gain from Acquisition?”* looked at over 12,000 deals over 20 years in the United States and one of the key findings was the striking difference between takeovers by large firms compared to small firms.
Their calculations indicate that takeovers by large firms have destroyed $226 billion of shareholder wealth over 20 years. In contrast, small firms created $8 billion of shareholder wealth through their transactions.
Small is Big
Contrast Vodafone’s message of a management perceiving itself to be ‘highly successful’ with Nick Kelsall, Norcros’ CEO, who spoke of the deal with Croydex as “a compelling fit”. There was not so much as a mention of their management qualities and so you begin to understand the world of difference between giant-scale, flag-planting ‘strategic’ deals and the timely, opportunistic transactions smaller companies can capitalise on.
In the Equilibrium equity models, we have favoured small and mid-sized companies for some time. Hopefully we have given a flavour of how they can deftly use corporate action to the benefit of shareholders. However, smaller companies also often fall prey to large company predators who tend to pay inflated prices to acquire them.
Either way, we win.
*“Do Shareholders of Acquiring Firms Gain from Acquisitions?” (National Bureau Economic Research Working Paper No. 9523), co-authors Sara Moeller, Frederik Schlingemann and Rene Stulz.