If nothing else can be said for mergers and acquisitions, they do at least provide the raw material for future spin-offs and demergers. How else would Hanson now be maintaining its shareholders’ interests if it were not busy subdividing the monolith built up over the years through takeovers? And how else would investment bankers, corporate lawyers and the rest maintain their luxurious life styles if they couldn’t advise clients on how best to unravel the M&A strategies they had recommended a decade ago?
Or is that too cynical? Are all aspects of life cyclical, subject to the swings of the proverbial pendulum and the waxing and waning of human interest?
Maybe. But market sentiment seems far from clear just now on the big vs small argument. It’s regarded almost as a truism that spin-offs are the fashionable way of returning value to shareholders and sharpening the focus of specialist business divisions.
But that’s too simplistic for today’s markets. Where spin-offs are seen as gratuitous exercises aimed at freeing a parent of an ailing child, without helping that child to stand on its own and grow, few shareholders are fooled.
On the other hand, any move that makes real business sense will be welcomed. Take the planned coming together of BA and American Airlines, in a sector where big is undoubtedly beautiful. Consumer perception may be confused but the commercial logic for shareholders is pretty straightforward.
Shareholders have also seen different approaches in the fast-changing US telecoms industry. AirTouch Communications, the San Francisco mobile phone company, was spun off from its parent in 1994 in order to meet a perceived need for greater specialisation. Its focus is the wireless niche, which it is busy building around the globe. Meanwhile, most other US companies in the sector have been merging with providers of complementary services in order to be able to offer the full spectrum of telephone-based services. Two different approaches, in other words, reflecting the strategic value that can be derived from spin-offs on the one hand, mergers on the other.
That’s not much help for company strategists looking for simple ways to please shareholders. But it might persuade them of the need for caution in the face of overtures from investment bankers offering them a quick route to satisfying shareholders on the basis of fashion rather than fundamentals.
