Mega-mergers: is it too late to stop the madness?

The high-profile takeovers of ABN AMRO (by a consortium of Royal Bank of Scotland, Fortis and Banco Santander) and of Alcon by Rio Tinto have seen the acquirers scrambling to raise funding in recent months. Former RBS Chairman, Sir Tom McKillop, admitted to the Treasury Select Committee that the acquisition was “a bad mistake”, while Rio Tinto have reportedly effectively conceded that the $US38 billion deal cost at least $US7.9 billion too much.

Indeed the FT notes that “the catalogue of mega-mergers now turning sour is growing by the day”.

So what lessons can be learned?

Mark von Rosing in his blog, Leadership Excellence, stresses that, “M&A is not strategy in and of itself, but a vehicle for executing a strategy and delivering shareholder value”, and cites a high failure rate in M&A deals. He notes motives for mergers and acquisitions that may not add shareholder value include diversification, manager’s hubris, empire building and manager’s compensation.

The Evening Standard today suggests that “top shareholders can and should do more to stop reckless bosses”. The article quotes Robert Talbut, chief executive of fund manager Royal London Asset Management, in relation to the ABN AMRO takeover. “We were surprised that others did not decide to vote against it,” Talbut says now. “We took the view at the time it was overpriced and it was far too risky, and that view has been vindicated. In some respects, we wish other institutions had taken a similar view to us.”

Talbot calls for shareholder activism – “How can shareholders and members of the board improve the level of understanding and dialogue? Clearly that has not worked as well as it should. One of our roles [as shareholders] has to be to provide adequate oversight to management action”.