The dawn of another week, and the dawn of potentially another high-profile tranche of mergers and acquisitions (M&A) matters across industry.
This Monday morning we have seen Aberdeen Asset Management and Standard Life announce agreed terms for an all-share merger, and the French company that owns automotive giants Peugeot and Citroen (PSA) reveal a €2.2bn ($2.3bn) deal to buy General Motors’ (GM) European unit, including Vauxhall.
For the former, the move will create one of the UK’s largest fund managers, overseeing assets worth £660bn, subject to shareholder approval. For PSA, it is thought that the move for GM Europe will expand its market coverage. With GM Europe not making a profit since 1999, there will likely be a focus on the synergy and savings to be made to realise the business’ profitable potential.
Both are very topical cases that exemplify the fundamental principles behind M&A. Put simply, M&A is one company seizing an opportunity to acquire another to strengthen its business, whether that’s by increasing its footprint, diversifying its offering against the backdrop of a challenging market, or purely to capitalise on another company’s ability to turn a profit.
But M&A is far from simple to actually achieve. That’s why, from an industrial gas perspective, we still await further movement on the proposed merger of equals between Praxair Inc. and The Linde Group.
There are often at least four key angles that have to be considered in any successful M&A in the industry; that of shareholders, regulatory bodies, the employees involved and, of course, the strategic interests of the companies themselves.
In the long run it is generally always the ambition of investor(s) to grow the business and raise its rate of return and, therefore, it is the effective management of all of these factors and the leveraging of the business’ underlying opportunities that will determine the degree to which it succeeds.
Any protagonist in M&A must get everyone truly on-board, for example. I understand the carefully calculated financial and strategic benefits of a deal have eluded those in the driving seat in the past, because they failed to anticipate and manage the fears and reactions of key employees in both of the organisations involved.
M&A can be a complex beast. There’s clearly a skilful art in brokering or managing the many facets it throws up. Perhaps that’s why in Linde’s case, the company coaxed its retired stalwart Professor Dr. Aldo Belloni out of retirement in December to reprise the role of CEO and oversee a merger with Praxair.
Dr. Belloni et al will undoubtedly have been negotiating a number of hurdles behind the scenes to date, chiefly those four key considerations. But I’ve been reading reports in the business community that suggest a fifth factor may have been at play – that of satiating the concerns of trade unions regarding jobs and corporate governance. Similar issues are thought to have been behind the initial breakdown in talks between the two companies back in September, when the ‘strategic rationale’ was first in place but discussions about aspects of Governance ‘did not result in a mutual understanding’.
Such challenges are to be expected in a deal of this ($65bn) magnitude. Official lines are few and far between while the complexities of the deal are thrashed out, but we may know more by the week’s end, when Linde will have completed the presser for its full year 2016 results (Thursday 9th).
Meanwhile, one might wonder if we will be any further forward on the acquisition of Yingde Gases by the end of the week. The company has appeared to be embroiled in a war of words with prospective buyer Air Products over the last month, with a new twist or turn in the takeover race emerging with every passing week.
When Air Products made its move to acquire the company in early January it looked like a good strategic fit for a Tier One outfit looking for new growth opportunities against a backdrop of major M&A all around it. That may still prove to be the case, but it’s an enterprising move that looks to have descended into a war of words, a la Airgas in 2010.
Both scenarios appear to have price/value and something of a public chess game of negotiation in common, but they are very different beasts altogether.
With Airgas the core issue was share price. The rapid pace of M&A over the last decade or more has driven up competition and in turn, a general acceptance that the majors may have to pay more for larger acquisitions or settle for a more modular strategy of piecing together multiple acquisitions to build the desired footprint. Reinforcing this sentiment, we have since seen Air Liquide pay more than twice what Air Products originally offered for Airgas, for example, acquiring the company at $143 per share – totalling a $13.4bn deal (including debt).
Financing a higher premium was likely a far bigger task when Air Products moved for Airgas in 2010; less than two years into the worst global financial crisis for decades, and when a very different credit environment existed. The company has since said it believes ‘a full price has been paid’ by Air Liquide.
With Yingde, though price is undoubtedly a central tenet, there’s a wider narrative being played out. The company has been tangled up in an apparently messy boardroom battle for months and Air Products’ bid represents just one story arc. The emergence of a bid Asia-based private equity firm PAG last week is yet another. It remains to be seen whether that will drive up the premium for China’s largest independent industrial gas supplier.
Likewise, time will tell whether the men and women from Allentown have been successful in their pursuit of Yingde Gases. The company is set for an extraordinary general meeting on Wednesday (8th), so there may yet be further developments before the week is out.
M&A, it’s a complicated business.