DROWNING IN TEARS

How blue-chip firms, including Woolies, Brait, Mediclinic and Famous Brands (to name but a few) are bleeding from their blockbuster overseas deals

It’s April 2014, and Woolworths drops a bombshell: CEO Ian Moir has just told the market his company will buy struggling Australian department store chain David Jones for R21.4bn, the largest foreign takeover yet by an SA retailer. That morning, Moir hosted a conference call, throwing around the usual MBA jargon used to justify these immense, crossborder deals: “increased scale”, “significant efficiencies” and, of course, “diversification”.

Reuben Beelders, a seasoned portfolio manager at Gryphon

Asset Management, was sceptical. “I was concerned that Woolworths management hadn’t learnt from the mistakes of other SA retailers who had failed in Australia. Management’s responses to analysts did nothing to ease my concerns.”

A fair point. Pick n Pay had come unstuck in Australia twice. In 1984, it opened a hyperstore in Brisbane only to swiftly close it; then in 2001, it bought 80 grocery stores under the Franklins brand, which it sold nearly a decade later with little return.

It was the same story with Truworths, which paid R155m in 1994 for the Sportsgirl Sportcraft Group, only to sell it five years later at a loss of R7.2m.

But Woolies, it seems, hadn’t done this sort of deep-dive research.

This was a red flag, says Beelders. Especially since Woolies was paying a 25% premium to the share price. Shareholders initially hated the deal: the share price plunged 8% on the day, but Moir’s charm offensive over the next few years made some analysts warm to David Jones.

Beelders says history was against Woolies anyway. M&A stats showed that at best only 30% of mergers or acquisitions succeeded.

A 2011 Harvard Business Review report puts “the failure rate of mergers and acquisitions somewhere between 70% and 90%”.

A KPMG study, published in 1999, concluded that “83% of mergers were unsuccessful in producing any business benefit as regards shareholder value”. In more than half, value was destroyed.

Perversely, the survey found that 82% of the executives sur- veyed “believed the major deal they had been involved in had been a success” — illustrating the cognitive dissonance between fact and perception in boardrooms.

Throw in the fact that with David Jones, Woolworths was buying a retailer in a quite different time zone, and where “SA companies have seen their backsides most unpleasantly”, and the challenge

What it means: Executive ego plays a big role in bad corporate decisions — and in delaying the fix