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 us.”
Businessmen are always more interested in size than profitability regardless of the economics of the industry. Big mergers increase the scope for political in-fighting. Gigantism inevitably brings diseconomies. Academic evidence suggests the odds of mergers succeeding remain stacked against the perpetrators.
Citicorp’s clients woke up one April morning to discover that they were now in bed not with a bank, but a ramshackle global conglomerate. The merger is a huge experiment which relies for its success on cross-selling insurance, banking and securities products to hapless clients around the group. Few financial institutions have been able to pull off the trick of cross-selling, so there will be plenty of room for banks with the wit to compete for the clients of this unwieldy colossus, built around an acquisitive insurer that is strangely shaky in the spelling department.
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one of the theories used to justify bull market euphoria is that post-war baby boomers are in their peak years for pumping money into pension funds. The worry is that if there is a market correction, these middle-aged savers will lose faith in equities and sabotage the market.
But now we have the chance of a never-ending bull market, courtesy of the US drugs group Pfizer and its new drug, Viagra, which cures impotence. Since about half the male population over 40 apparently suffers from the problem, this has demographic implications. The pensions time bomb that threatens European public finances could now be defused. And young trophy wives of ageing US investment bankers will now be able to fulfil their maternal instincts-a perfect synergy gain from a marriage of pharmaceuticals and banking, front runners in the bull market.
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does the blair government’s love affair with business mean that Aims of Industry, the maverick right-wing pressure group, will soon have better access to No. 10 than the TUC? I asked Aims’s Michael Ivens, veteran campaigner against nationalisation, with tongue only half in cheek.
No hope, he said, recalling the tale of a leftish deputy of his at Aims who implausibly aspired to be a Labour MP in the 1970s. The snag on his curriculum vitae was a spell in Broadmoor, which arose from his stabbing of two unfortunate women, while temporarily unhinged. Ivens advised a precautionary talk to a Labour friend (now in the Lords). Broadmoor, advised the Labour grandee, was no problem, but Aims was a non-starter.