“Companies are for buying and selling”
Perhaps twenty years ago, I had a colleague who joined the firm I worked for from a small consultancy specialising in advisory work on mergers and acquisitions (M&A). He spent many hours over an extended period of time trying to persuade me to his point of view that companies were for buying and selling – in other words they were a commodity that should be traded just like a used car or a tonne of steel. I argued strongly against this at the time, saying that businesses were there to be operated, and steered towards sustainable and profitable growth, thus securing the employment of the staff, the relationships with suppliers and customers, and generating good returns for the shareholders. I was perhaps a little naïve at that time, and do see that sometimes a business will perform better when it is either combined with a larger parent that provides access to new opportunities, or is divested and is allowed more freedom away from the constraints of a slow-moving corporate.
This was brought to mind by the news over the last day or so that Hedin has come back in with another offer to buy Pendragon, still ranked number 8 in Europe on the basis of turnover in our latest rankings (and therefore larger than Hedin itself), and that an activist investor, Viking Global Investors, has snapped up 60 million shares in Cazoo after a further fall in the share price, giving them a 7% stake. The two examples are quite different. Hedin operates a successful dealer group in a number of European markets and its intention is clearly to acquire the Pendragon business for the long term to become part of its portfolio of group businesses in this space. There are some potential synergies, for example in purchasing scale and digital investments. The Viking investment is different. As far as I am aware, they have no experience or skills in automotive retail – they just feel that there is a profit to be made from Cazoo’s problems, and would like a share of that.
Other than these two headline examples, there are clearly many other M&A deals going on in the industry every day on a European basis – individual entrepreneurs who decide to sell their dealership business to a larger group, and small software companies with niche products who are made an offer they can’t refuse by larger tech businesses that see the opportunity to extend their product offer at low cost. We also have other headline examples such as the ongoing restructuring of the VW Group brand portfolio to put Bugatti into a new joint venture with Rimac and the pending spin-off of Porsche back into a standalone listing as a public company in its own right.
Positives of M&A may be where the original investors have simply run out of steam and the motivation to take the business forward. Many dealership sales fall into this category where all the family wealth is tied up in a business which is increasingly steered by the manufacturer partners, and the family decide that the business has moved on from when their parents or grandparents founded it in very different times. Some staff might find this transition tough, but basically the rationale is sound and the acquiring company can quickly get positive returns out of this type of plug-in deal. In other cases – typically the software companies and some niche OE suppliers, selling to a larger business opens up new markets that could never be accessed as an independent over any sensible timeframe due to management and financial constraints. Here the prize is clear, but so is the risk – that the entrepreneurial spark and customer focus that created a successful small business is snuffed out by the corporate controls and structures into which the business is absorbed.
Management focus can be another positive reason for M&A. After Ferdinand Piech stood down from the VW Group, did Bugatti get the senior management time and investment that it needed to move forward? In a JV with Rimac, we can assume that Mate Rimac will spend a lot of time ensuring that Bugatti manages the transition to an electrified product range successfully, and there are surely more synergies between the two brands now than there ever was between Bugatti and even Porsche, let alone VW themselves or Seat. The case for an IPO of Porsche seems more challenging, given the real technology synergies between Porsche, Bentley and Audi. This feels a lot more like financial engineering, than a true separation of the business.
I am left with the view that there can be good reasons to buy, sell or merge companies, but the real value is where there is a sound business logic to the deal on both sides which lasts beyond the initial transaction. Where the primary motivation is to drive short term profit out of the deal, or to solve some short-term funding or operational challenge, it is unlikely to bring sustained benefits to both companies, and possibly to neither