Bank Mergers in Europe?

I agree that tighter regulations and worsening economic climate may lead to bank mergers in Europe: http://on.ft.com/rS5PEO

Other news clips of interest for this week:

WPP acquires Glover Park Group

BHP puts diamonds division up for sale

Olympus Saga

Olympus agrees to acquisitions probe

The more I learn about business, the more one thing becomes clear: ability is a small part of running a business. There are many ways to excellence and profits in business, and ability is definitely one of them. Business however, I have learned, is more complicated than that. As the Olympus saga illustrates, many times businesses are able to survive misspending millions. As long as the business model remains intact and there is somebody who thinks that the business can generate cash at an acceptable rate of return, the business will survive. I also see compliance and not ethics as the defining force for the code of conduct, which I attribute to the fact that self-interest is the defining force of capitalism. Unsurprisingly, unbridled self-interest can be fairly self-destructive as well. Regulations keep that in check to some extent, but there are always people looking for a loophole. So goes the game of cat and mouse.

In terms of M&A, it brings out some critical questions like value of an acquisition to the buyer and the fees paid to advisors. Already enough research papers have indicated that, at least in the short-run, the value of the acquisition goes to the seller. Deals like the infamous sale of ABN Amro raise a pertinent question on the effectiveness of advisors. The last thing the M&A world needs is the use of advisory as a cover for siphoning away millions from a company. All in all, an ignominious event in the corporate world that should be dealt with firmly.

Potential Upcoming Deal-business from European Aeronautic Defence and Space Company (EADS)

In a recent article in the Financial Times (August 2011), EADS’s chief financial officer stated that the company is looking to make acquisitions to put its €11bn of net cash to work and rebalance its portfolio.

Data from public sources indicates that in 2011 alone EADS subsidiaries have announced five acquisitions valued at about £1510m. These include acquisition of Vizada by Astrium, Satair and Metron Aviation by Airbus, Vector Aerospace Corporation by Eurocopter Holding and Grintek Ewation by Cassidian. Of these, Vector Aerospace Corporation deal was completed recently in June 2011. With so many acquisitions already in the pipeline and with presumably more to come, a full service firm can offer EADS a variety of services and advice.

For example, 'Consultancy’ practice can possibly help EADS with acquisition search and due diligence. Then ‘Corporate Finance’ can provide M&A Advisory and deal accounting service. Finally, ‘Transaction Services’ could offer M&A Integration and post-acquisition performance improvement advice.

About EADS: EADS engages in the manufacture and sale of commercial aircraft, civil and military helicopters, commercial space launch vehicles, missiles, military aircraft, satellites, defence systems, and defence electronics, as well as provision of services related to these activities worldwide.

About Aeronautics and Aviation industry: According to a report by ‘Ecorys Consulting’, the aviation industry has been under duress due to the financial crisis, which is critical for a capital intensive and global industry. Another recent report by ‘Roland Berger’ indicates that due to the crisis defence sector is also expected to suffer due to cuts in state spending. Business leaders expect the industry to return to pre-crisis growth levels at least by 2012. Overall, this state of aerospace and defence industry should present cash-rich EADS with good bargains in the market.

Writing on M&A

Working with Deloitte has certainly whetted up my appetite for M&A. Thought it may be good to do some pointed reading to further improve my understanding of the subject. So, from now I will periodically post articles highlighting companies that have shown interest in dealmaking, and it may be possibly worth somebody's time to pursue them for business. Sometimes I will also post my opinion about a deal, or simply aggregate some M&A specific news articles that I find interesting. All the views expressed are my own, and I will duly acknowledge and mention all the resources I use. Like a true consultant, in no way I take responsibility for anybody following any advice that I may ever give. Nevertheless, I hope you find the articles useful.

The Nomura Game

Reading an article on Nomura's efforts to radically change its culture and absorb people from Lehman got me thinking. From whatever I have read/experienced about either management or leadership, the effort looks doomed to fail miserably. Nomura is clearly thinking "the best of both the worlds", but all I can see is a "fall between two stools".

On one hand Nomura is trying to change the culture of its own employees from top up. As far as I know, the Japanese society is very hierarchical and people respect "elders", every member is expected to respect his role in the chain. By removing seniority as a defining factor and bringing in performance related pay Nomura seems to be moving in the right direction from corporate point of view. However, that does not mean that it will not create any resentment. I am not sure to what extent these decisions were debated company-wide to cushion their impact. The current facts indicate that they were not.

On the other hand it is trying to absorb the talent it bought from the remains of Lehman. Most of Lehman people may find the culture almost as alien as the Nomura employees may find the Lehman culture disagreeable. At the end who can leave will leave, which means Nomura risks loosing the best of its current AND Lehman employees.

From pure management and leadership point of view, I feel it violates three key principles.

First, it is trying to fix something that may not be necessarily broken. It is worth noting that Nomura was able to buy Lehman only because it had been conservative. If it wants to change to "Lehman" culture, the current employees are well within their right to question the sensibility of the decision.

Second, instead of building two distinct, decentralized units Nomura is trying to have one quick merger of two entities that are poles apart. It is like General Motors deciding one fine day that Chevrolet and Cadillac would be made by one unit to achieve economies of scale and share best practices. At best it is going to be problematic, at worst catastrophic. There are better ways to achieve the same result.

Third, it is not making enough effort to overcome the pretty evident communication gap between the two units, accentuated by the language and cultural differences. Without that the decisions, however well thought, will look like enlightened despotism and further alienate people.

Overall, Nomura has got itself in a tight spot. Although the basic thought process has been correct, it looks like that the implementation will run into problem due to lack of communication and lack of consideration for the cultural differences. Nevertheless, I feel that the situation is still not beyond redemption and if addressed right away can help Nomura immensely.