Is a merger best?

It's amazing how most things in the region happen all at once. It's so basic and so fast. But is this herd-mentality going to save the region from the natural course of the economic downturn?

Mergers are events that most of us witness once in a while, but it seems to have now become the latest trend.

Last month, Nakheel announced it would merge with DMCC in response to the steep market downturn.

Then Emaar followed suit just last week, by announcing it was set to merge with three Dubai Holding-owned developers Dubai Properties, Sama Dubai and Tatweer.

A few days later, Abu Dhabi based ANC Holdings along with its partner Flag Holdings bought a 51% stake in themed contracting company Amusement Whitewater and formed what they're now calling a "turnkey solution".

And what's more, I hear a couple of more mergers are on the way soon.

The ANC-AWW tie-up was, however, a little different. Fantasy leisure projects are not high on anyone's agenda currently, leaving AWW without work, so with ANC Holdings' willingness to shell out the money, it was a match made in Abu Dhabi.

The downturn has so far seen property prices tumble more than 50%, billions of dollars worth of projects cancelled and thousands of people lose their jobs. But is merging really the answer?

Mergers seem a good idea for small companies that aren't too successful or when the result of the merger will increase the worth of all companies involved.

But with the current financial situation, companies need to take a closer look at the reasons and expected results of merging before they go ahead.

Most importantly, one needs to assess the motives of all parties for the merger; the financial situation of the companies that are merging and if their coming together will make them stronger. But if even one of them is in trouble, then it will drag the other ones down and that's when a merger goes bad. The most well known example is General Motor's acquisition of Fiat and Saab in 2000 where GM ended up losing more than US $6 billion.

I'm not saying these mergers will end up in trouble, but going by the way things have been done in the past, it does raise some concern.

Let's just hope that the homework was done, and done well.

Conrad Egbert is the editor of Construction Week.

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READERS' COMMENTS

Article quality very poor
Posted by Andrew Preston, USA on Friday 10 July 2009 at 09:42 UAE time


I am very surprised the editor would allow such a poorly written, uninformative, misguided, and technically incorrect article to be published.

To Jack
Posted by Luis, Dubai, UAE on Sunday 5 July 2009 at 18:37 UAE time


Jack, thanks a lot for the reminder. This brings things into context.

It would be great if someone took the effort to build the story, from the IPO until now, with the stock price evolution and who were the bigger winners and losers.

Maybe this is a reasonable "homework" to go with this piece?

Mergers..!
Posted by Jack, London, England on Sunday 5 July 2009 at 15:59 UAE time

Just a small point of order on the reported 'merger' between Nakheel and DMCC. DMCC, like Limitless, are already part of the Nakheel behemoth, they were originally 'demergered' to be stand alone specialist entities for specific business models. This move is likely to be an inhouse corporate 'restructuring' exercise of staff and finances than a merger in the true sense.

I am not even sure this is funny.
Posted by Luis, Dubai, UAE on Sunday 5 July 2009 at 15:12 UAE time


I know it has been pointed already but "Mergers are events that most of us witness once in a while" where have you been living man? under a rock? In the floor of the ocean?

Have you heard of a book called "Barbarian at the gates"?

Do you realize that M&A means "Mergers and Acquisitions" and banks used to employ scores of people for this event "that most of us only witness once in a while"?

None of your relatives/friends was ever made redundant after a merger?

This one is also a good one "Mergers seem a good idea for small companies that aren't too successful or when the result of the merger will increase the worth of all companies involved."

I fully agree on the second part... but the first one? why is a better idea than small unsuccessful companies merge any better than big unsuccessful ones doing it. This size-related reasoning totally escapes me.

And the "homework" or should I dare say "due diligence" better be done.

Now going to the core issues, I also share the doubts about the rationale for the mergers. Cynics, a growing race in this land, may point to the similarity between merging two flagging construction companies and merging two underperforming banks as the japanese did with gusto (and my own country seems to be ready to do with the Spanish Savings and Loans). Very seldom you will get a healthy company by merging two sick ones, and more often you will end up with a company too big to fail. Often the solution lies in letting the weakest one die and the stronger ones feed on the carcass. But of course that requires a political courage that is hard to find as the costs (the death of the weakest) are coming early on and the potential benefits will come later... if ever.

So many questions... We just need Omar here to bang us on the head for daring to question the wisdom of these decisions.

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