By Tirthankar Mukherjee
Small may be beautiful – left to myself, I would change that “may be” to “is” – but since time immemorial, man has almost always thought the ger to be more covetable. The Manu Samhita, an ancient Indian text incorporating ideas of government that was compiled between 200 BCE and 200 CE, mentions a theory called the matsya nyaya, literally meaning the “law of fishes”, which pinpoints a fundamental practice in nature: small fish become the prey of the fish. The treatise says it is the job of a government to enforce laws and restrictions to ensure that this does not happen. But it does, all the time around us, and mergers and acquisitions in the corporate world are examples and expressions of this human trait.
Elsewhere in this issue you will find several quotations from speakers at a recent conference in Ulaanbaatar that was called “Mongolia: New Frontiers in M&A and Private Equity”. I was not there but reports on the proceedings say participants were agreed, and agog, that acquisitions were waiting to be made and discussed the best ways to structure deals, to the satisfaction of both buyer and seller. This is not an easy thing to achieve, and I felt some foreboding on what lies in store for small Mongolian companies as cash-rich predators come on safari. Companies do need money and expertise to grow and survive, and neither is locally plentiful in Mongolia, but once you join the market and play by rules set by impersonal and ruthless arbiters swearing by the right of capital to move freely, we could really see an avalanche of corporate raiding in the wake of the boom, especially in mining. Where does it leave somebody who built up a company from scratch, and finds it hard to be reconciled to selling stocks to raise more capital and losing control, even if partially? But such sentiments do not count for anything in the market. Corporate gamesmanship would aim for what could be called takeovers, mergers, leveraged buyouts, or restructurings intended to create efficiency and value.
It was not apparent from the reports if totally and not-too- Mongolian-owned concerns were also considered ripe for grabbing, but there is no reason why they should escape the attention of ever-alert empire builders. A megamerger and smaller transactions are not so different in their fundamentals, so I would say they are also fair game. The Chairman of the Mongolian Stock Exchange was reported to be upbeat about the prospect, as any ambitious stock exchange has to measure its success by the extent to which it can help in the freeing of equity trapped in old-line, inefficiently managed firms with outmoded control systems and nonfunctional governance systems.
So, what really are mergers and acquisitions? In essence, mergers are union of two or more corporations by the transfer of all assets to a single company, while acquisitions are capture of one company by another by transferring all assets to the acquiring company. Often due to complexities of ownership and other interests it is not sure who is acquiring whom and if it is a merger or an acquisition. Whatever it is, the weaker gets gobbled up, and that is where Mongolian entrepreneurs could be at a disadvantage, as inexperience of and unfamiliarity with the intricate alleys of negotiation, inadequate access to fresh credit, and cultural inability to resist variously disguised pressure could work against them.
Merger and acquisition are not synonymous. It is true that they are often uttered in the same breath but they do mean slightly different things. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. The target company ceases to exist as the buyer “swallows” the business. A merger, on the other hand, happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. In practice, however, actual mergers of equals do not happen very often. Usually, one company will buy another and, as part of the deal’s terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being “bought out” often carries negative connotations, and, therefore, deal makers and top managers try to make the takeover more palatable by describing the deal as a merger,
For my purpose here, it is important to say that a same special alchemy marks both a merger and an acquisition: it is the equation that one plus one makes three. The avowed principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. This rationale is often a cover-up for blatant corporate greed that crosses national boundaries and downplays cultural differences. Companies will justify their buying forays under the pretext that they wish to create a more competitive, cost-efficient company, hoping to gain a greater market share or to achieve greater efficiency.
There are many things going for M&A. Among them are economy of scale, access to new technology, improved market reach and industry visibility. In the Mongolian context, the gest gain could be improving the new company’s standing in the investment community: ger firms often have an easier time raising capital than smaller ones. That said, achieving synergy is easier said than done, and sometimes when two companies merge, one and one add up to less than two.
The anticipated benefits and efficiencies often never materialize once deals are completed, the disappointment coming as perceived premerger synergies turn out to be elusive. In the Mongolian context, a wide array of ethical questions will be involved, many of them relating to the degree of “fit” between the value systems of the firms doing the deal. Such mismatches have frequently been seen in cross-border M&As, particularly in emerging economies. On paper, mergers and acquisitions look terrific, but I cannot help feeling that the Mongolian will not always be the one to have the last laugh.
Unfair as it may seem, the market owes little to people as individuals, particularly the weak and the vulnerable, and movements “forward” are possibly inevitable and inexorable in today’s highly competitive global and globalised economy. Emerging markets are undergoing radical changes both in terms of increased competition in product markets and increased investment in financial markets by international investors. I can only hope steps are taken to facilitate the orderly development of an M&A market in Mongolia.
It was fortuitous that I read about the Ulaanbaatar M&A meeting on the same day that newspapers reported the death of Theodore Forstmann, who would have, in all likelihood, not shared my concerns, probably unfounded, about the possible threat to Mongolian entities. He was an American billionaire, and the leveraged buy-out pioneer credited with coining the phrase “barbarians at the gate”. His legend was immortalised in the 1990 book Barbarians at the Gate, whose title emerged from a conversation Forstmann had with the chief executive of Bristol-Myers, who, perplexed by the buy-out boom, was warned: “The barbarians are at the gate, and they’re coming for you next.”
Is that meant to ring a bell in Mongolia?