When PPL Corp. (NYSE: PPL) agreed to buy British power distributor Central Networks from German owner E.On AG (PINK ADR: EONGY) last week, the $5.6 billion bid by the Allentown, Pa.-based utility highlighted a key advantage that U.S. firms have when it comes to corporate-takeover battles in the international arena: In most countries, the staff and customers of the target company prefer a U.S. suitor to those from most other nations.
How do I know this? Simple ... my mother told me.
One Tough Cookie
My mother - 85 years old and living in Cheltenham, England - is a frail-but-formidable Central Networks customer. The company regularly sends her final demands for payment and threatens to cut her off - not because she forgot to pay, but because of repeated errors by the utility.
These "final notice" warnings are generated because someone read the wrong meter - or because the company sends my mother cutoff demands for someone else's address. (As I'm sure many of you know, thanks to the inefficient computer systems currently employed by so many utility companies, today's retirees - especially those who don't use the Internet - can expect to spend increasing amounts of their time dealing with such wayward missives.)
Mother takes great pride in handling these things. And she does so firmly and efficiently. On one occasion, when local customer service was unsatisfactory, she called E.On's head office in Düsseldorf, Germany, and berated them in her somewhat-rusty German. (French would have been easier for her, but the British utility owned by France's Electricite de France SA, or EDF, unfortunately covers a different part of the United Kingdom.)
Having forged such a wonderful rapport with the Central Networks/E.On customer-service folks in both Britain and in Düsseldorf, Mother has been very unhappy over the last few years as rumors flew that E.On might sell her electricity provider.
One rumored suitor was Russia's Gazprom OAO (PINK ADR: OGZPY), which would have been something of a mixed bag for Mother: Her Russian is somewhat better than her German; but when it comes to customer service, Russian firms are known to be somewhat lacking.
In the week before the takeover was announced, another potential suitor emerged - this one being Cheung Kong Infrastructure Holdings Ltd. (PINK: CKISF). That, too, was a mixed-bag proposition. The odds were probably pretty good that this Hong Kong-based heavyweight would probably actually get the computers to work so that Mother would actually receive the correct utility bill. But if this new owner failed to do so, learning Mandarin was probably beyond her at this stage of her life.
A New Kind of Dealmaking
Twenty years ago, most acquisitions were domestic. And the deals that were international in nature were mostly carried out by U.S. companies that were buying much-smaller, local operations. If you worked for a "local" company, or were its customer, being sold to a U.S. multinational did not make much of a difference to your life.
Since there wasn't a ton of pressure on short-term earnings, the acquiring company would generally leave the newly acquired local operation pretty much intact, although over time you could expect to see incremental efficiency increases.
The British automobile manufacturer Vauxhall Motors kept the same union rules and the same pay scales after being acquired by General Motors Co. (NYSE: GM) in 1925, but over the decades of GM ownership the scale of its operations and Vauxhall's efficiency improved.
That's not true anymore. Today, international acquisitions are far more common, a much higher percentage of large companies are part of global multinationals, and the style and origin of the buyer are crucially important to the workers and customers of the company concerned. To take one favorable example, the workers at the Jaguar Land Rover (JLR) factory in the British Midlands, owned by Ford for 20 years, were apprehensive when it was taken over by India's Tata Motors Ltd. (NYSE ADR: TTM) in 2008.
In spite of those fears, the acquisition has turned out very well for all concerned. After losing money in the downturn, Jaguar Land Rover has become very profitable, and has provided Tata Motors with an entrée into the top end of the global vehicle market.
Costs are not particularly an issue for such expensive cars, while Tata potentially brings the marques a major new market among wealthy Indians. Thus, the British workers' jobs are secure and Jaguar Land Rover buyers find that Tata is highly sensitive to the brands' traditions and has the money to expand the carmaker's operations.
Conversely, acquired companies can find life difficult in the arms of Gazprom or MMC Norilsk Nickel, the two major Russian buyers of overseas assets. For one thing, the ownership is subject to power struggles; it is also likely to run out of money if Russia suffers a liquidity shortage or the management falls out of favor with the government.
Likewise, China-based suitors that are controlled by the government could be problematic as acquirers, as are sovereign wealth funds from unstable countries. Even soccer players must worry - the Libyan Investment Authority controls the Italian club Juventus.
Customers and employees of major companies are all voters in their home jurisdictions, and have ways of having their voices heard. Solid U.S. companies understand the fears that uncertainty can bring, and when they buy your local power or water company or stand to become your new employer have a well-practiced way of reassuring all the "stakeholders" who might be affected by any deal. As a result, U.S. firms have a major advantage as buyers for this reason.
To that end, the Allentown-based PPL seems like it will be the ideal owner of my mother's power company.
PPL will probably manage to get the right bill to the right customer. And if it doesn't, I'm certain the folks in customer service will - over time - absolutely fall in love with Mother's cut-glass English accent.
If there is a downside, I suspect that I'll be the one who feels it most.
You see, if there's a problem with her electric bill, Mother may well phone me here in America and insist that I "drive there" and straighten it out in person. I can already hear her saying: "It's only up the road, dear" - although, in my case, "only up the road" equates to a trip of about 200 miles.
Although some folks disagreed with his conclusion, the reality is that Hutchinson's calculations were based on numbers and facts. And his conclusions forced people to think.
That ability to see what others can't is why Hutchinson warned Money Morning readers of the danger of credit-default swaps months before those derivatives blew up, told you to buy gold at $770 an ounce, or accurately predicted precisely where the bear-market bottom in stocks would be. We can document each of these claims.
And that brings us to our main point: Isn't this a guy you want on your side? Don't you want the benefit of his thinking?
If you don't, then read no further. This offer isn't for you.
But if you do, we urge you to check out this report, which talks about his advisory service, The Permanent Wealth Investor. You'll never look at the financial markets in the same way again.]
News and Related Story Links:
- Money Morning Special Report:
This Middle East Meltdown Will Send Oil to $300 a Barrel - and Pump Prices to $9.57 a Gallon. - FoxBusiness News/Dow Jones Newswires:
PPL to Buy Central Networks from E.On UK for $5.6 Billion Cash, $800 Million Debt. - Central Networks:
Official Website. - Bloomberg News:
PPL Buys E.ON's U.K. Power Grid for $5.6 Billion Cash to Triple Customers - Wikipedia:
Vauxhall Motors. - Wikipedia:
Jaguar Land Rover (JLR). - CleatBeat.com:
Juventus Face Libyan Crunch. - RTT News:
Thomson Reuters Says Global M&A Activity Value Rose 22.9% In 2010. - Reuters:
Global M&A to hit $3 trillion in 2011 - survey - Thomson Reuters:
Best Start For Global IPOs on Record. - PPL Corp.:
Official Website.
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And the point of this post was ???
Dear Publius:
Thanks for the comment and for the question. And here's your answer: There's been a lot of lamenting the "Late Great United States," and there's even several marketing campaigns out there (including a campaign by a U.S. firm that's being broadcast on the international shortwave bands) — that are beating the drum about the "end of America."
According to those campaigns, America is too fat, too slow, has too much debt and has no competitive advantages to speak of.
Against that backdrop, as we point out in the editor's note that precedes Mr. Hutchinson's column, global M&A action is on the upswing — and in a big way. In fact, world dealmaking is on a pace to have its hottest year in more than a decades.
Interestingly enough, as Martin points out in today's column, there is an area where America has definitely not lost its edge — as a suitor in these global deals. U.S. companies are still perceived as bringing more to the table than rivals from most other countries….and that's a perception shared by most of the key stakeholders who have interests in companies that may be takeover targets.
These "stakeholders" include employees, customers, stockholders, and managers of the firms being targeted for acquisition.
What Martin is saying is that U.S. firms are still perceived by the members of these disparate groups as having attributes and strengths that so far eclipse those of suitors from other countries that these stakeholders would still prefer to become part of an American firm — as opposed to one from Russia.
It's a valid point. And in this particular column, Martin makes that point in a way that's both imaginative and entertaining. Not many columnists are able to make such a good business case, and yet do so with such a deft personal touch.
Martin has that skill.
This was a superb column. And it's an example of why he's such a key part of the Money Morning team of global experts.
Don't forget, Martin is the guy who told readers to buy gold at $770 an ounce, who warned of the dangers of credit-default swaps — months before the credit crisis when most retail investors had never even heard the term — and who called the 2009 bear-market bottom….when most investors believed stocks were headed higher.
In fact, after the rebound started, Slate magazine set out to identify the market prognostiactor who "called" the market bottom for the 2009 bear market in U.S. stocks, it first settled on super-economist Nouriel Roubini.
When it investigated further, however, the magazine found that Roubini was clearly only the runner-up in the "Call the Bear Market Bottom Sweepstakes."
The winner, Slate found, was Martin Hutchinson.
The bear market bottomed on March 9, 2009 — meaning that this week was the second anniversary of that market nadir.
In June 2008 — when the Dow Jones Industrial Average was "comfortably above 12,000, and when most market forecasters were predicing that U.S. stocks would be heading HIGHER, Hutchinson warned that the Dow could be headed for a 40% spill.
It was a gutsy call…..meaning once again that readers who heeded Hutchinson likely did very well.
The bottom line here is that Martin has delivered a tremendous amount of value to Money Morning readers, providing the kinds of insights and actionable advice that most investors would be willing to pay quite a bit for … given the accuracy of his predictions.
And yet, because of the nature of Money Morning, as a global investing news service and daily e-letter that are provided at no charge to readers and subscribers, Martin's advice is FREE.
So when you look at this column — which is excellent in its own right — I think you also have to look at it as a snapshot in a thick album filled with similar great works …. the sum of which provides investors with the best insights they'll find anywhere.
This is a big reason that he's developed such a big following in his advisory services, which is where he details his very best ideas.
Martin Hutchinson is the real deal. There are thousands of pretenders out there who claim to have the answers, and who urge you follow their calls. But Martin is the guy you'd be SMART to follow.
Publius, I hope this answers your question.
I also hope that some of these comments perhaps help some of the other folks who might read this …. I'm talking about investors who aren't happy with their current investment program.
For anyone in that situation, take a minute to find out a little bit about Martin's advisory service. It's called "The Permanent Wealth Investor," and in it Martin uses the same thinking that he used to make these market "calls" that I've mentioned. The difference is that, as good as his picks have been here in Money Morning, he reserves his very best picks for the advisory service.
For those of you who feel a need to change direction with your investments, at least check out Martin's service. It can't hurt to look, and this could be the kind of investment program that changes your life.
Go to….
http://moneymorning.com/video/pbi/pbi_math.php?code=WPBIM200
Respectfully yours;
William Patalon III
Executive Editor
Money Morning
im afraid your mother is suffering a little confusion as to how the electricity sector works in the uk. She buys her power from Eon, and it is delivered to her house by Central Networks. Central Networks invoices Eon; Eon invoices your mother.
From your mother's point of view she won't see any difference whatsoever from PPL buying the distribution business – she is a customer of Eon's, not Central Networks.
Hopefully TATA can do a better job with Land Rovers much deserved poor reputation for reliability.