So, Mayo hit the lottery jackpot and that wasn’t even the biggest deal of the week. In fact, it was another mayo, Hellmans, and its owners, Unilever, who stole the show with a punchy $68 billion bid for the consumer goods division of GlaxoSmithkline(GSK). As the son of a mayonnaise manufacturer once upon a time, there’s a danger I might lack the dispassionate eye required for this M&A story. However, I would not be alone. There were a record $5.7 trillion of M&A deals initiated in 2021 which is the boomiest it has been since 2007 and a certain Tiger Taoiseach promised “more boomer”. Why the emotion? Bluntly, a big deal can be a seductive fix for an ambitious or fearful CEO despite the abysmal odds of success. In fact, the Harvard Business Review suggests the failure rate of M&A sits between 70 and 90%. Here is a quick list of some of the things which can go wrong in a deal:
- Departures of key people, culture clashes
- Misunderstanding the key drivers of the target company’s success
- Missing a structural change in one of those success factors
- Motivation of the buyer
The last factor is not something which goes wrong but is usually hidden behind financial models, management speak and the dreaded “Three S’s”. These “S’s” were red flags my former boss, Terry Smith, used to scorn and actually banned from use in his own board room when considering deals. Indeed, Terry has not been shy in recent weeks about Unilever’s loss of focus and, as the UK’s very own Warren Buffett with a stellar performing $40 billion fund, he’s always worth a read or listen. Terry’s three linguistic terms of M&A fury are….. “strategic”, “scale” and “synergies”. I can only imagine the speed of the Bovril hitting the fan in the Mauritius-based Fundsmith research office when Unilever’s defence of its poorly received M&A move cited a “strong strategic fit” with the target GSK unit. Oh dear.
Smith was already on the war-path in his recently published annual letter to Fundsmith investors (highly recommended reading by the way). As Unilever’s 10th biggest shareholder, his frustration at the poor performance of the shares focused on a management “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”. This extremely rare occurrence of challenging ESG signalling zoomed in on mayo again and delivered quite the zinger – “The Hellman’s brand has existed since 1913 so we would guess by now consumers have figured out its purpose(spoiler alert – salads and sandwiches).” Oooft!
Let’s just say the Unilever management struggling with an underperforming share price are under pressure which should put motives for M&A action under even more scrutiny. While I do not wish to dive into the ESG ‘virtue signalling’ debate in this article there is certainly some investor head scratching going on right now. The FT has referenced a Credit Suisse research report which has highlighted the uncomfortable fact that US companies with high ESG scores performed worse than lower-rated companies last year. Clearly, sustainability is not a one direction bet and complicates M&A thinking even more. Here’s a few other issues worth keeping an eye on:
Unilever is a classic example of a company with a collection of global brands which have been built up over decades. My concern now is how quickly companies and their products or services can grow at warp speed from local to global in a matter of years, not decades. Slack and Twilio reached $100m of annual revenues within 3 years and 5 years respectively. Yes, these are technology products but one can’t help thinking Gen Zers, influencers, social media virality and technology itself can speed-up brand growth massively. Conversely, older brands might be perceived as possessing shallower “economic moats” than Warren Buffett would have defined.
It is a perennial problem for company remuneration committees. What do we value, how is it measured and how do we pay the management for delivery? Sadly, quite a few of these measurements/metrics can be flattered (and problems hidden) by a ‘transformational’ M&A deal of significant scale. It won’t be missed by the many daily lottery losers around the world that the 10 richest men(yep) on the planet doubled their fortunes through the Covid-19 pandemic (source: Oxfam) from $700 billion to $1.5 trillion. That equates to the GDP of Canada, or the 10th biggest economy in the world. Now think about Apple and its CEO Tim Cook. Since he took over the reins from Steve Jobs in 2011 the Cupertino giant has grown its market value from under $400 billion to $3 trillion.
Tim Cook’s reward for $2.6 trillion of wealth creation and 100 below-the-radar M&A deals in the last 6 years is a net worth of $1.5 billion. Of course, Cook has been fabulously rewarded but as a percentage of wealth creation it’s 1/2600th of the total gain for shareholders. One can be absolutely certain that the post mortems of the circa $10 trillion worth of M&A deals done in 2020 and 2021 will ultimately reveal wealth destruction but deliver monetary ‘rewards’ to executives on a different planet to Tim Cook’s experience. Perhaps it’s wishful thinking to think executive incentives will face increased challenge from Harvard-type data inside the board room. History rhymes, repeats and all that but history also shows income inequality at 1930s extremes and a decade to which most governments will want to avoid comparison. Better the board acts rather than trigger the mayhem of government intervention me thinks…
There are clearly ESG/Sustainabilty risks attached to many products (energy, food, transport etc) and services(gambling, finance etc) which could mean M&A due dilligence misses a potential structural shift. However, financial history shows that certain sectors go through consolidation phases when under regulatory attack. Think tobacco, telecoms and utilities. One wonders could sustainability/ESG factors be both deal risks and drivers of M&A trends? Maybe Unilever is more worried about food sustainability risks than they have publicly admitted and …..possibly the funds selling Unilever shares over the past 12 months share those fears?
Who knows the answer to that question or the impact of brand speed, executive incentives and regulation on the current frothy levels of M&A activity. However, expect these questions to grow in significance and perhaps send the eventual answers on a post card to Mauritius, or maybe not!