Beware those offshore expansions | Fin24

Beware those offshore expansions

Oct 26 2017 09:20
Simon Brown

How many successful large mergers, acquisitions or moves offshore can you name? 

A few jump out at me: SABMiller, Bidcorp (under the then Bidvest), Steinhoff and BHP* (the latter narrowly avoiding disaster when its 2007/08 attempted takeover of Rio Tinto ultimately failed).
My point is that while these large-scale deals are usually met with delight from the market at the time, the truth seems to be that most of them end up failing or are, at best, disappointing. 

Sure, they muddle along and sometimes admit defeat such as Discovery* did with its US debacle, and Old Mutual in the case of its UK adventure. 

Very few such ventures turn out to be the huge successes shareholders were initially promised.

Whenever a large non-hostile deal is announced, management always talks about synergies, savings, new lines of profit and geographies earning hard currency. 

It all sounds excellent, until the hard work starts.

With mergers and acquisitions the price being paid is usually too high as the seller (or sellers) always wants to extract as much as possible. Fair enough. 

We typically see this as the premium being paid for the company being acquired. 

The second issue is that merging two large companies is complex, takes time and the synergies that look great on paper are seldom as profitable as promised.

The big move offshore is generally just as bad. Overpaying is once again the first crime. After the overpaying, disaster stories often follow. 

It is one thing being the top dog in South Africa, a market the local company understands and has years, if not decades, of experience operating in. 

As soon as a company moves offshore all sorts of new dynamics come into play – dynamics that are seldom anything like we experience in SA. 

So now shareholders have to deal with an expensive foray offshore followed by depressed returns from the journey.

In time things may work out. The business may eventually start generating decent profits in a different currency, meaning great diversification. 

But at what cost to shareholders who fund the acquisition, often by rights issue or a short-term forfeiture of dividends? 

This all happens at ostensibly no cost to management, which seems to get a free pass as it promises to fix things. Things it broke.   

But realistically, what can we as shareholders do? Yes, we can read and reread the relevant documents – but they are generally of insane complexity and also written by a management team whose members want the deal. 

That means the wording is coloured by their enthusiasm.

I think a good first step would be for the management team to announce firm timelines as well as expected savings and synergies. And perhaps then management’s predictions could be measured against the outcome after the deal. 

The team would then be rewarded accordingly.

But perhaps the better approach is gentle and slow? Rather start with a small acquisition that does not cost the earth and won’t take all of management’s time. Then grow it over time, adding as it grows. 

In other words, choose the slow and steady approach rather than big and brash.

I suspect one final aspect of the problem is that shareholders want ever-increasing growth and profits, which become harder and harder to achieve in our relatively small economy without making some big deals or moving offshore. 

Maybe as shareholders we need to temper our demands and be happy with solid but boring growth, accompanied by solid chunky dividend payments from current operations?

Do we really need to be shareholders of the southern hemisphere’s biggest food and clothing retailer?

Or selling burgers in the UK? Why not settle for the best locally that makes strong profits at great margins and we can decide what to do with those profits?

*The writer owns shares in Discovery and BHP.

This article originally appeared in the 2 November edition of finweek. Buy and download the magazine here.

growth  |  expansion  |  discovery

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