Having just enjoyed another World Cup, indulge me and let me talk about football, or at least a football transfer.
This is the story, perhaps apocryphal, of the negotiations behind the scenes in 2005 when Chelsea, emboldened by the wealth of new billionaire owner Roman Abramovich, decided to buy Shaun Wright-Phillips (pictured), a rising attacking star, from the perennially underachieving and financially troubled Manchester City.
Chelsea bid £22 million for the winger, back when £22 million was a lot of money. City wanted the cash but Wright-Phillips had been their player of the year for four successive seasons and had just enjoyed a year of sensational goals and match winning performances that had established him in the England team. So its chairman decided to try and hold out for £25 million by rejecting the first offer.
“Well that’s sad,” Chelsea’s negotiators are said to have told the City camp. “We do still want him. But here’s the thing. Tomorrow our offer will be £21 million. And if you’re still messing us about, then the next day it will be £20 million and the day after that the offer will be £19 million.”
Within 12 hours Wright-Phillips had signed a five-year contract and was holding up a Chelsea scarf in front of the main stand at Stamford Bridge.
The story came back to mind during discussions of the extraordinary dynamics in M&A right now, which centre on the turbulent confluence of extraordinary interference from US regulators amid the wholesale transformation spurred by new technology in media, consumer, retail, pharmaceuticals, financial services, energy and other industry sectors.
Most M&A bankers had been anxious about the fate of AT&T’s proposed $85 billion takeover of media company Time Warner, the owner of CNN, president Donald Trump’s least favourite channel.
The Justice Department had found reason to sue to block the transaction on competition grounds. This was despite the fact that this was a vertical deal – two companies in adjacent businesses of content and distribution coming together – rather than two leading providers of the same service combining to reduce consumer choice and raise prices, which is the usual rationale for most mergers even though no one ever comes out and says so.
When US District Court of Columbia judge Richard Leon decided in June that the AT&T Time Warner deal could go ahead, M&A bankers’ joy was unconfined. They began looking forward to all manner of strategic deals, with attention turning to Comcast and a potential battle with Walt Disney for 21st Century Fox, owner of the president’s favourite channel.
Everybody is thinking about possible combinations in Europe, because regulators here are virtually begging them to get on with it- Banker
But Euromoney speaks to a top M&A banker still fixating on the lessons of yet another deal, one that the Trump administration did manage to scupper back in March – Broadcom’s $130 billion unsolicited approach for Qualcomm, which was blocked on national security grounds.
Even after many years in the business, this banker is re-evaluating his tactics. His understanding, before the Committee On Foreign Investment in the US’ decision that ended the bid, was that Broadcom was likely to win support even though it had dropped its price for the target because it said Qualcomm itself was bidding too much for NXP. The target having its own live bid made this a complicated, three-dimensional game of chess. But received wisdom in M&A is that you can’t drop your bid and somehow expect to win.
“It got me thinking,” this banker says. “In most contested M&A deals, the toughest thing is to convince the market that you really have made your last and final offer and you are done bidding. Acquirers tend to go up incrementally. They offer $50 and then $52 and then $54. But then they get caught telling shareholders: ‘Ignore the bums on your board rejecting our offer; they’re destroying value’. But the shareholders are thinking: ‘Well they’ve already screwed $6 per share more out of you, let’s just see if they can get us another $4.’”
He admits: “Maybe I’ve been doing this all wrong for years. Maybe it would be better to go straight from $50 to $60 and then say: ‘If the target takes defensive actions that we think destroy value, we’ll offer less.’”
Let’s see, because this M&A banker might soon be advising his own chief executive and presenting to his own board. While Euromoney was running around meetings with top executives of banks in the US and Europe last month to discuss the awards for excellence, it quickly became obvious that what is distracting most of them is the siren call of a coming wave of bank M&A.
Discussions now range far beyond the mooted combinations of Barclays and Standard Chartered (which most bankers deem highly unlikely), UniCredit and Société Générale (quite possible) and Deutsche Bank and Commerzbank (almost inevitable).
The long-forgotten game of fantasy match ups is in full swing. Forget how Neymar might fare at Real Madrid; welcome to ‘could Bank of America buy Credit Suisse’?
“Everybody is thinking about possible combinations in Europe,” one banker in London tells Euromoney, “because regulators here are virtually begging them to get on with it. There are hardly any pan-European banks, even though the continent depends on job creation through SMEs, which utterly depend on stronger, bigger banks. And the market capitalization of large US banks is running far ahead of big banks here.”
It is almost like the tension just before kick off in a crucial match.
“But what might really get it started,” he says, “is one of the big American banks coming in here and taking out a significant target.”
It is intriguing that bankers are even talking like this. Euromoney won’t hold its breath. The post-crisis restructuring of banks ended the era when they tried to be all things to all customers everywhere. Yes, we could see almost any big European bank’s shareholders biting the hand off any US firm making an offer. They would be like Manchester City. But US regulators might take a distinctly jaundiced view of any such move and the bidder’s shareholders too.
Wright-Phillips was my favourite player. His career stalled at Chelsea. He came back to Manchester on a cut-price deal and ended up in a football backwater, playing with his younger brother for New York Red Bulls.
Don’t fall in love with somebody else’s asset and overpay. That wisdom always holds.