Insight: A marriage of equals.

Chris Ward of Deloitte & Touche describes a nil-premium merger as a merger in which two companies get together simply in order to exchange shares and allow their shareholders to benefit from the synergies of the combined group in proportion to their holding in the enlarged capital of the surviving entity. In contrast, even agreed mergers have typically involved one firm offering at least some premium over the other’s recently-prevailing share price, writes Peter Williams.

But, Ward adds, although a number of deals have been announced in the past year, the failure rate is steep and is even higher if putative deals that were never given a whiff of publicity are included.

In those deals that work, the gearing risk implicit in the bid premium when one company makes an acquisition is removed, and if the synergies of the merger are under-estimated everyone benefits. Or – as is more likely in practice – if they are overestimated, then the pain is shared equally.

The nil premium seems to have the distinct advantage of not having the disadvantages of straight acquisitions. First, there’s no cash alternative as there is with most acquisitions which therefore have to make a lot of financial sense to justify the risk of higher gearing. Secondly, there isn’t the risk that, if the acquirer has got its sums wrong, the bid premium turns out to have been little more than a transfer of value from the acquirer’s shareholders to those of the target.

A nil-premium merger will not work in all circumstances. If one company is much bigger than the other, its shareholders end up with the lion’s share of the enlarged equity and any increase in shareholder value. But the companies don’t have to be exactly the same size. There is room for manoeuvre through introducing a small premium by adjusting the share exchange ratio. (Technically this is no longer a nil-premium merger, but that’s a minor quibble).

According to Deloitte’s Ward, the real benefit of the nil premium may lie in the fact that sometimes two plus two can equal more than four.

Barry Riley, FD of Protheries, the nil-premium merger between Proteus International and Therapeutic Antibodies, reports on progress to date: “The merger is going well. A lot of costs have been taken out of the operation.

We are now a stronger, broader organisation.”

But before such rewards can be reaped any deal has to sort out the key question of management. Retention of management will be crucial for the enlarged ongoing business – yet after the merger there will only be room, for instance, for one financial director. No doubt, as in the case of mergers between professional firms, this must be handled with impartiality.

It helps if one FD is happy to fall on his or her sword for the good of the shareholders.

No premium on these merger urges

Completed: Reckitt & Colman/Benckiser (now Reckitt Benckiser) Dec 99 £5bn British Steel & Koninklijke Hoogovens (now Corus) Oct 99 £3.5bn
Southern Electric/Scottish Hydro (now Scottish & Southern Energy) Dec 98 £5bn
Proteus International/Therapeutic Antibodies (now Protheries) Sept 99
£60m Tried and failed: Alliance & Leicester/Bank of Ireland June 99 £5bn
Tarmac/Aggregate Dec 98 £1.6bn.

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