The recent mega-mergers show that manufacturing is a mug's gameby John Plender / June 20, 1998 / Leave a comment
Unlike some other deals in this roaring bull market, the takeover of US car maker Chrysler by Germany’s Daimler-Benz has the merit of industrial logic. But it does raise an intriguing question about the relative valuation of companies.
The motor industry is hugely important for trade, investment and employment. Yet before news of the deal leaked, the two motor giants were jointly valued in the stock markets at ?31 billion. This was a third less than Lloyds TSB, a predominantly domestic British retail bank, and about half the worth of drugs group Glaxo Wellcome.
On the same day two other merger partners, Citicorp and Travelers, were together worth ?95 billion, close to the combined stock market value of Ford, Chrysler, Daimler-Benz, Volkswagen and Honda. Meanwhile Rolls-Royce, the world’s top motor marque, is being sold to the Germans for less than ?0.5 billion.
What does this tell us? Not that the car industry suffers from surplus capacity. Banking has that too. Rather, that manufacturing is a mug’s game. Now that the Japanese have taught us all how to do it, monopoly-type profits in mainstream manufacturing are hard to come by.
Compare and contrast, as the stock market does, with a Glaxo Wellcome wonder drug or Microsoft’s Windows software. The conclusion: no contest. The cultural advantage of the Germans and the Japanese in manufacturing is not quite the boon to their economies that it once was.
Yet these numbers also suggest that the stock market has gone loopy on financial services. The enormously fat margins in British retail banking, for example, stem not from providing great service, but from the bankers’ new-found commitment to a narrowly financial definition of shareholder value. As David Davis of the Commons public finance committee has rightly diagnosed, the banks are mugging their customers. Ripping off the most important stakeholder group in this way guarantees that these fancy valuations will not be sustained. At least the motor industry strives mightily to deliver decent cars to the consumer.
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the financial community’s response to the potential merger of Travelers and Citicorp is to say that it changes all the rules. But the strategic thinking behind it appears to come from Lewis Carroll:
He thought he saw a Banker’s Clerk
Descending from the bus:
He looked again, and found it was
“If this should stay to dine,” he said,
“There won’t be much for…