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For Better or For Worse (Student Version)
The Case of Gillette and Parker Pen
Parker Pen was founded in 1880 by George Parker and became a world-wide symbol of quality in writing instruments. The firm only lost its way in the early 1980's when attempting to enter the mass market in disposable pens. Losses followed and in 1985 a management buy-out restored profitability by shifting back up-market. Then, early in 1992, the directors decided to put Parker up
for sale with a price around £300m.
The company's profit in 1992 was £33m on global sales worth £180m. Its UK market share was 53% with only four significant competitors - Shaeffer, Cross, Mont Blanc and Watermans - each with shares of 5 - 7%.
On 10 September, Gillette, the US maker of shaving and luxury products agreed to buy Parker for £285m. Significantly Gillette had already purchased Papermate and Watermans and now wanted Parker to bridge the quality gap between Papermate (lower end) and Watermans (top end).
At this point the government stepped in. Trade and Industry Secretary Michael Heseltine referred the bid to the Monopolies & Mergers Commission (MMC) in October, arguing that the deal could take Gillette's UK market share to over 50% for refillable pens. There were fears that Gillette could use its market power to raise prices and restrict choice in a market where promotion
costs were already a barrier to entry.
But by February the lights were green. The MMC approved the deal on the grounds that Gillette would be constrained by 'numerous competitors' and by the bargaining power of the retail chains. Waterman, Papermate - and Parker - were part of Gillette.
Dixons and Currys
Few customers of Currys electrical stores today realise that the company is wholly owned by Dixons. But back in 1984 Currys was still independent and managed by the Curry family. It was also an arch rival of Dixons.
Dixons
It was 1948. Stanley Kalms was 16 when he persuaded his dad to convert the family's photographic studio into a camera shop. Now company chairman, he developed Dixons as an aggressive retailer of hi-tech electrical goods. He was early into the video and home computer markets, always aiming to extract high sales from smaller town centre sites.
Currys
The firm was founded in 1884 by Henry Curry selling penny farthing bicycles. After evolving into a retail chain, the company came to concentrate on medium-tech white goods such as fridges and washing machines. Having pulled out of the home computer market, the new plan was to split the shops between those selling white goods and those selling higher-tech products - closer to the
Dixons range.
On 4 October 1984 - in the middle of Curry's centenary celebrations - Dixons launched its attack offering £182m for the complete Currys chain.
'Currys is not performing anywhere near adequately. We believe we can make some dramatic improvements' Stanley Kalms, Dixons.
'I wonder where they have been for the past few years. Recent market research shows customers think we are more up to date than Dixons. Their offer is totally inadequate'. Terry Curry, joint MD.
Who was dreaming?
During October Currys share price soared from 255p to over 400p - above the 382p value of Dixons' offer. On 7 November Stanley Kalms increased his bid to £225m causing a further surge in Currys share price. An increasingly desperate Currys now provided a complex deal for shareholders where leasing property would raise a cash payment of 150p per share. But despite gyrations in
Currys share price, bid acceptances were pouring in to Dixons' merchant bank. On 30 November the 50% mark was crossed. Dixons claimed victory and Currys conceded defeat. It was all over. A few days later the Curry family directors were ousted from their posts.
Sainsburys and Texas
On 24th January 1995 Sainsburys announced that it was to purchase the 200 store Texas DIY chains from Ladbrokes for £290m. Ladbrokes could then focus on its hotels and gaming operations while Sainsburys could expand its successful Homebase chain without the problems of finding new out of town sites.
Homebase - 120 stores
Launched in 1981, the Sainsbury's DIY and gardening subsidiary is relatively up-market with enviable profit margins of round 7%. Profits for the last 6 months were up 34% at £15.3m on sales of £218m. The goal was to overtake B & Q and become the UK's No.1 in DIY.
Texas- 200 stores
Originally established in 1972, Texas specialised in higher volume, lower margin DIY products. Profits for the last 6 months were down 17% at only £2m on sales of £182m. The firm was being hard hit by the recession and depressed housing market.
Some City analysts were critical of the deal. £290m looked a high price for a business making £8m annual profit on margins of about 1%. Conversion to the Homebase formula would be expensive? Could Sainsburys expect to extend Homebase margins to the more down market Texas stores?
It was true that the whole home improvement market had excess capacity after the 80's boom but Texas had made its own problems through price cutting and weak stock control. Arguably these problems had been addressed by the time of the sale to Sainsburys.
Homebase now hoped to hold around 10% of the total DIY market and Sainsburys was relieved to avoid an MMC investigation.
By May 1995 it was announced that only 26 Texas stores were to close with limited redundancies. Sainsburys found that full conversion to the Homebase format was an investment worth making and allowed £50m for the task.
Q: Make a summary of the key motives in merger or take-over initiatives based on these three examples. What other motives can be important?
Merger activity has tended to be concentrated over particular periods: 1967 - 72, 1984 - 89 and an upturn from 1995. When a merger is proposed - or achieved - there is usually a rush of optimistic claims about the benefits expected. Yet the reality is that relatively few mergers fulfil expectations while 54% produce 'neutral' to 'poor' results (Schoenberg, 1994).
Some UK and International Mergers
| Foods & Drinks |
| Tesco and Wm.Low |
(1995) |
| Rowntrees and Nestlé |
(1988) |
| Cadburys and Trebor |
(1988) |
| Cadburys and Schweppes |
(1969) |
| UB and Ross Young |
(1987) |
| Guinness and Distillers |
(1986) |
| |
| Household |
| BHS and Mothercare |
(1985) |
| Boots and Ward White |
(1989) |
| Next and Grattons |
(1986) |
| Kingfisher and Comet |
(1987) |
| |
| Hotels |
| Trusthouse and Forte |
(1974) |
| |
| Airlines |
| BA and British Caledonian |
(1988) |
| BA and Dan Air |
(1992) |
| |
| Cars |
| BMW and Rover |
(1995) |
| Jaguar and Ford |
(1988) |
| |
| Pharmaceuticals |
| SmithKline Becker and Beechams |
(1989) |
| Wellcome and Glaxo |
(1992) |
| |
| Machinery & Industrial |
| Ransomes and Westwood |
(1990) |
| Hanson and EverReady |
(1980) |
| |
| Banking & Insurance |
| Lloyds and TSB |
(1995) |
| Lloyds and Cheltenham & Gloucester |
(1995) |
| HSKB and Midland |
(1993) |
| Royal Insurance and Sun Alliance |
(1996) |
| Halifax and Leeds BS |
(1994) |
Q: Choose any one of the mergers above or identify one of your own choice. Carry out an investigation to decide:
- what were the key arguments in favour of the merger?
- to what extent was a net gain achieved?
- were there any significant external costs or benefits involved?
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