So why is competition such a dirty world for large parts of Australian business?
The question comes to mind as the tooing and frooing continues over the approach by Myer (MYR) to David Jones (DJS) requesting consideration of a merger in late 2013.
While there has been a lot of critical comment about whether the David Jones board should have entertained the offer – and not enough about the terrible financial underpinning for the move, very few of the commentaries have looked at whether such a deal is needed and if it would, in the end create value.
Both department store majors have looked flat and reactive in recent years as tough trading conditions, smaller and better managed rivals and the internet, have passed them by.
Their basic strategy has been to moan about staff costs, the unfair competition from the internet and call for tax increases on offshore online purchases.
Most likely, judging by the unhappy track record of mergers and acquisitions, a combination of Myer and David Jones would end in tears. It would be a last desperate act by two managements who have run out of ideas.
It’s a daft idea being promoted by Myer management who seem to be at a loss to do next as department stores of the standard DJS and MYR are, are increasingly bypassed by faster, nimbler rivals, especially online.
And it’s telling the offer from Myer was an all scrip one, not cash.
That tells us Myer a) hasn’t got the cash and can’t raise it, b) wants to rope David Jones shareholders into the dud deal because it knows if it offers cash, the DJs holders will take that and not the paper.
That’s a lack of confidence that says volumes about the future prospects for the merger.
DJS Vs MYR 5Y – Department stores in structural decline
And to clear up an idea that has been reported – that the competition regulator, the ACCC – wouldn’t stand in the way of a merger, the Commission yesterday said that wasn’t the case
"The ACCC is aware of recent media reports which suggest that the ACCC has indicated that it would be unlikely to object to a merger between Myer and David Jones. To ensure there is no confusion about the position of the ACCC on this issue, the ACCC wishes to make clear that it has formed no such view and it has provided no such indication, either formally or informally, to Myer or any other person.
"Should Myer or David Jones decide to pursue a merger the ACCC will then conduct a very thorough review, in accordance with its published guidelines, that would explore a range of potential competition issues."
So could the ACCC save the two retailers and their shareholders from such a silly valuing destroying idea? Here’s hoping.
Mergers on the whole don’t create value and those that fail, fail badly for shareholders and employees – Just look at the $US30 billion and more in losses racked up by Rio Tinto over its over priced $44 billion takeover of Alcan back in 2007, as the global economy was about to fall into the GFC.
The BHP merger with Billiton at the start of last decade has been a failure – all BHP’s tier one assets were its alone – iron ore, oil and gas and copper in Chile.
And look at Myer itself – the 1986-987 takeover of Myer by GJ Coles which (helped by considerable board and managerial incompetence), condemned the merged company to over two decades of staggering underperformance that only changed when Wesfarmers grabbed control of Coles in 2007-08.
That deal has been portrayed in some circles as a positive – but financial hard heads point out how Wesfarmers’ dividends have fallen sine the takeover, and how Wesfarmer’s returns have plunged as well because of the weight of Coles’ huge, low margin revenues.
But for the likes of Coles Supermarkets, the Kmart stores, plus Officeworks, the merger has seen an improvement. Bunnings, which came with the merger is humming, but Target has slumped badly in the past two years and lost its way.
Then there’s the Fairfax Media acquisition of Rural Press (controlled by one of the Fairfax family) which has cost billions in asset write downs and losses and almost caused Fairfax Media to fail.
And we also have the value destroying $US5.8 billion takeover of the Dow Jones Co by Rupert Murdoch’s News Corp that cost $US3 billion in asset impairment losses, and is worth even less.
The 1986 takeover of the Herald and Weekly Times by News Corp was a success for 20 years, until the internet came along and destroyed the analogue print model, forcing around $US3 billion in losses in the value of the company’s Australian newspapers.
The mergers in the early 1980’s of the various banks that helped created the NAB, the ANZ and Westpac worked, while the CBA was formed in the early 1990’s and has taken over Colonial and Bank West.
But Westpac and the ANZ almost collapsed in the 1990’s because of bad debts, high costs, some of which related to a weak integration after the original mergers, which didn’t strengthen the company or its management the way they were supposed to in the original deals.
Seven West Media was formed from the takeover of West Australian Newspapers by the Seven Network, controlled by Kerry Stokes.
That was a value destroying deal if ever there was one and Seven West shares are well below the levels they were just after the deal was done several years ago.
The shares are a faction of the $15 plus they got to in 2007, before the GFC.
Bank of America’s Merrill Lynch analyst, David Errington, who has covered retail, consumer products and diversified industrials over the past 30 years, reckons takeovers and acquisitions destroy, not build value.
According to the Australian Financial Review, he this week criticised Wesfarmers, Woolworths and Coca-Cola Amatil for destroying value by diversification.
In the case of Wesfarmers, Errington cited the $20 billion purchase of Coles in July 2007.
“Despite management claiming it has been a successful acquisition for Wesfarmers, the facts are that returns on equity fell from positive 25 per cent pre the acquisition to 6 per cent post the acquisition and remain well beneath 10 per cent six years after the acquisition,” he says in a note to clients.
“In addition, dividends per share were above $2 a share pre the Coles acquisition and six years after, are still well beneath $2 a share.
“Clearly, the Coles acquisition has been (for Wesfarmers shareholders at the time Coles was acquired) a poor decision," the AFR quoted Mr Errington as saying.
He bagged Woolworths for seeking growth outside of its core business of supermarkets which have very high margins and high cash generation.
Errington says Woolies has looked for growth outside of supermarkets through expansion of NZ Supers, Big W, gaming and now hardware and home improvement through the purchase of Danks and the greenfields investment in the Masters chain, which is supposed to taken incumbent, Bunnings.
According to the AFR, Errington said that Coca-Cola Amatil’s $500 million expansion into canned fruit making a decade ago through the purchase of SPC Ardmona, is another example where diversification has destroyed value.
If anything de-megers are now the go in business – not takeovers – Brambles last year spun off Recall to its shareholders (Recall is a paper-based records company with some digital businesses).
Amcor spun off its Australasian and some Asian packaging businesses into a new company called Orora.
News Corp split itself into 21st Century Fox and News Corp in June of last year – the shares of both companies have done well since, as have the shares for Recall and Orora.
And overseas more and more companies, including global blue chips such as Nestle, Procter and Gamble, 3M, Dow Chemical, Apple, Microsoft, Sony, IBM and an increasing list of other giants, are under increasing pressure to hive off poor performing businesses, or those which seem to have holding back the company.
Google quit its mobile company, Motorola after only two years after spending $US12.6 billion on it. The loss – $US8 billion at least.
Much of the pressure is coming from activist shareholders and other big shareholders (such as huge US and European pension funds), but some companies, sniffing the breeze, are starting the process themselves because their boards see the only way to grow is to shrink and reshape the company, even if you are a global giant.
David Jones shares ended up 1.6% on $3.11 yesterday, Myer shares finished up 2.3% at $2.66.
