Making a mesh of a merger.

When Siebe and BTR announced their £8bn merger on 24 November they caught more than a few analysts and industry players by surprise. As one veteran City observer told Financial Director, “This is a deal driven by fear rather than by hard business logic.” This is not, of course, the way the deal has been presented by the participants. The synergy in the arrangement, we are told, lies not just in a degree of fit between the two companies’ process controls and automation businesses, but in the fact that Britain needs a mega engineering company if it wants to keep its place at the global table, alongside the US and German giants. The trouble with this sort of argument is that it immediately begs the question of whether, if that is the case, a more appropriate British engineering giant could have been created from some other combination. If, in other words, there is nothing overwhelmingly compelling about this combination – and the expressions of surprise all round the shop argue that there is not – then why are the parties involved so keen on the merger? The consensus of opinion, in BTR’s case, appears to be the lifeboat theory. The fact that in the week before the merger BTR’s share price was at an all-time low adds weight to the sentiment aired in the financial press. BTR sees this as at least a plausible way of instilling new life and purpose into a dying conglomerate. Nothing wrong with that, of course, provided it works. Siebe’s incentive could be nothing deeper than an opportunistic predatory grab. The all-time low share price makes the slightly larger BTR appear a much more digestible meal and it will, on the surface, give Siebe that much needed “scale”. However, bland comments from the two chairmen about “an excellent business fit” aside, the thing that appears to be worrying many in the City is why a company that at one time was in great danger of degenerating into a conglomerate (one thinks of Siebe in its pre-Foxborough days), would want to saddle itself with a merger partner such as BTR, which is still very much in the process of sloughing off its asset grabbing past. To put it simply, if you want to gain scale as an engineering giant, why not merge with or buy a fully fledged, already tightly focused engineering company? What makes the merger all the more difficult to read is the fact that, whereas one would normally expect the new entity’s reconstituted board to have the finance function headed up by the FD from the lead player in the deal, in this case the reverse has happened. If the merger proceeds – a rather large ‘if’ given the speculation that another predator might yet be tempted by that low valuation figure – BTR’s FD, Kathleen O’Donovan, will head up the new BTR Siebe finance function. On the face of it, this is unsurprising, since Siebe announced the resignation of its long-serving FD, Roger Mann, in July. Mann stayed on as a director until December 1998 but, given his resignation, is clearly not a candidate for the post. His successor, Philip Cox, is generally thought to be rather too new to the position to have been able to stake a large enough claim. Besides, the rules of the merger game, which is what the BTR Siebe deal is couched as, specify a more or less equal carving up of places. Since BTR’s chairman Lord Marshall gets the chairmanship and Siebe’s chief executive, Allen Yurko, gets the chief executive spot, it might seem only right, under the one-for-me, one-for-you rule, that the next slot should go to a BTR person, namely O’Donovan. “And jolly good luck to her too,” one is tempted to say. Summing up her capabilities one City commentator noted that while O’Donovan has what he termed “an encyclopaedic knowledge” of BTR’s costs and problems, she will be in a completely different ball game in the new entity, should it come to pass. Moreover, though O’Donovan has to be accorded some of the credit for the more or less efficient programme of disposals that has seen BTR raise £5bn through the sale of “surplus” businesses over the last two years, she also has to bear some of the blame for the drift, having been with BTR since 1991. One of the problems that O’Donovan might find herself having to sort out is a feeling among some in the City that Siebe itself might be “losing the script” a little. The company has made a number of acquisitions over the last few years and could once again be running the risk of looking a little too much like a conglomerate rather than the focused engineering company it sees itself as. She will also have to reassure Siebe shareholders who are worried about the possible infusion into their company of BTR’s culture and practices. Having the BTR FD in situ won’t do much, initially, to alay those fears. Moreover, as the share price at the time of the proposed merger indicates, the market still seems to need convincing that Ian Strachan, aided by O’Donovan, has done enough at this point to refocus BTR. If that was unfinished business, lumping the whole of Siebe into the equation is not going to make things easier. If the view from the City is mixed and somewhat confusing, the view from academia seems a lot more positive. Edinburgh University’s Regis Professor of Engineering, Iain McGeough, for example, points out that Siebe and BTR are only putting into practice what engineering companies of all sizes are talking about all the time right now. “Engineering is already on the brink of a recession. Merging is seen as a way of pooling resources and reducing overheads. We need one or two companies of the scale of this proposed merger to compete with the Asian and US companies, so I wish them well,” he says. Having been in a series of European Union “New Framework” discussions in recent months, McGeough is adamant that the large engineering companies right across Europe are going to have to learn how to combine to match the scale of their competitors elsewhere in the world. “If we can’t structure successful large mergers within national boundaries, how can we hope to do it across Europe?” he asks.