The era of the mega-merger is over

As shown by the mess resulting from the failed wranglings between Glencore and Xstrata, globalisation has consigned the mega-merger to history. Matthew Lynn explains why that's no bad thing.

There was a time when the huge mergers and acquisitions (M&A) deal was the pinnacle of City work. It was where the big fees were earned, and where the brightest minds in the industry concentrated their energies. When any big deal was announced a well-oiled machine clicked into action, with armies of advisers, PR men and brokers ensuring a multi-billion-pound combination was put together with as little trouble as possible. Not any more. The mega-merger has turned into the mega-shambles.

For the past six months mining giants Glencore and Xstrata have been trying to combine their two businesses. The deal was first formally tabled in February as a merger of equals'. Last week, the super-smooth Tony Blair was even called in to try and smooth the process. But even the man who managed to keep Gordon Brown at bay for a decade couldn't calm the skyscraper-sized egos involved in this deal for more than a few days.

Indeed, it's hard to believe the two firms can successfully merge now. So much time has been spent wrangling over the terms that there can't be much goodwill left. Likewise, it's hard to believe that both firms (and, more importantly, their shareholders) wouldn't have been better off spending all that time, energy and money scouring the world for new mines rather than locked up in Canary Wharf haggling over the fine print of the deal.

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So why has it all taken so long and been so difficult? Part of the answer is that it may have been a rotten deal to start with and the executives involved may have been inept. But it could also have been scuppered by globalisation. In the heyday of the mega-merger, deals were arranged between a small group of people who all knew each other, either in the City or on Wall Street. But the protests against the Glencore-Xstrata combination all came from outside that network. And with shareholders now spread around the world, it may be impossible to pull off a mega-merger anymore.

On the surface, there was nothing much wrong with the idea of merging Glencore and Xstrata. They are both big mining and commodities conglomerates, an industry with huge economies of scale. Being bigger probably is better. It certainly makes just as much sense as some of the mega-mergers of a decade ago such as Glaxo and SmithKline in the pharmaceuticals industry (a deal worth $78bn), for example, or Vodafone and Mannesmann in the mobile telecoms industry (a $200bn deal).

The problems have come from persuading shareholders to back the deal. The most vocal have been the Qataris. Qatar Holdings would be one of the main shareholders in the combined business and the Gulf state was not happy with the terms it was being offered. But they were not the only roadblock. Norwegian sovereign wealth fund Norges Bank Investment Management also threw a spanner in the works. Both are outside the small club of big shareholders that used to decide the fate of any big merger. And both either didn't know what the rules of the game were, or else decided they didn't want to play by them.

That is an inevitable consequence of a more globalised capital market. Big British firms used to be largely owned by the major British fund managers. A City-based investment banker would know who had to be brought on side for the deal to go ahead, would know the individuals personally, and would lean on them (or else offer them some sweeteners) to make sure they had their support. A deal would get done over drinks somewhere, and usually before any merger was announced. It certainly wouldn't spill out into a long and acrimonious public argument. The same was true in New York, or in Frankfurt or Zurich. It was practically unheard of for a merger to fail once it had been unveiled and certainly not because shareholders didn't like it.

But that world has disappeared. Take a look at the ownership of any FTSE company now particularly in the top half of the index, where you find the really big companies and its shareholders are just as likely to be in the Gulf, or Moscow, or Shanghai as they are to be in London or Edinburgh.

That trend isn't about to go into reverse. The shareholdings of any major company are now so widely spread it is going to be very hard to get a majority of them to agree to anything let alone something as contentious as a merger. It might still be possible to buy a big rival so long as you are prepared to stump up tens of billions in hard cash. But swapping shares to create a new company looks impossible. No CEO can look at the hell Xstrata's Mick Davis and Glencore's Ivan Glasenberg have been through over the last year and think that it is an experience they would like to go through themselves.

Globalisation has consigned the mega-merger to history. That may be no bad thing. Nearly all of them were oversold, and hardly any created any lasting value. The Qataris and the Norwegians are acting out of self-interest, but in this instance they are probably helping the rest of us out as well as themselves.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.