Hello, and welcome back to our ‘Top 10 Corporate Deals’ ladder. So far we have had a stellar IT investment with a bad outcome, a dramatic football victory, and an even more dramatic last minute merger-savior, and we are just getting started!
6. Lloyds’ acquisition of HBOS
The headlines: ‘Lloyds seals rescue deal for HBOS’, Reuters, 18 September 2008
Who’s involved: Linklaters for Lloyds TSB Group and Allen & Overy for HBOS
Why you should know about this: It is a somewhat natural transition from one credit crunch driven acquisition across the continent to another, local, one. Once again, the collapse of Lehman Brothers had an effect on this deal, as Lloyds TSB (as it was called at the time) were endeavoring to acquire HBOS – the holding company of Halifax and the Bank of Scotland – in order to save it from its own inevitable collapse.
The proposed acquisition, announced on 18 September 2008, promised to create the biggest financial services provider in the UK. In a business sense the transaction was valuable in terms of exposing Lloyds to the commercial property market, as well as expanding its residential mortgages portfolio, since Halifax is known to be the biggest provider of residential mortgages in the UK.
The deal was concluded on 19 January 2009. In order for the deal to be completed 75 per cent of HBOS shareholders had to vote in favour of the deal. This so called ‘special resolution’ was approved on 12 December. In contrast, Lloyds TSB needed only a 51% vote in favour (an ordinary resolution). In addition, the UK government had to effectively waive any competition law issues which would normally be taken into account in such a big transaction. Although the terms of the deal suffered several variations, it was finally agreed that acquisition would be made for £14.2 billion, at a value of 0.605 of Lloyds TSB shares for every HBOS share. In addition, the deal had to be implemented by means of a Scheme of Arrangement under sections 895-9 of the Companies Act 2006.
Almost a month after the deal was completed, Lloyds Banking Group revealed losses of £10 billion at HBOS, £1.6 billion higher than Lloyds had anticipated in November due to the poor housing market conditions. In consequence, Lloyds’ share price on the LSE dropped by 32 per cent. As a result of its higher-than-expected debts, Lloyds Banking Group incurred a £4 billion loss in the first half of the year. In fact 80 per cent of Lloyd’s soaring bad debts were caused by HBOS.
This transaction has been particularly critisied by the media and financial experts, and serves as an example that not every deal is for the best. Compared to the BA/Merrill tie up (see Part 1), there was not the same amount of pressure from the Government on the buyer. However, it is still an example that in critical situations, the Government can intervene in an influential corporate transaction. In this case it did so by rendering any competition law elements irrelevant.
5. ExxonMobil merger
The headlines: ‘Exxon, Mobil mate for $80B’, CNN Money, 1 December 1998
Who’s involved: Hogan & Hartson (now Hogan Lovells International) for Exxon Group Ltd
Why you should know about this: Although it has been over 12 years since completion, this merger is still significant due to the fact that it created the third largest company in the world at the time; today the largest by market cap and the largest publicly traded company. At the time of the transaction the world press speculated significantly on its implications, arguing that as a consequence the oil industry would be heavily monopolized. They weren’t wrong.
The deal featured the world’s largest energy group, Exxon, acquiring the second biggest US oil and gas company, Mobil. Combining $247 billion of total market value, this deal created the largest industrial company in the world, and the third largest company behind GE and Microsoft. Mobil shareholders were given 1.32 Exxon shares for each Mobil share.
The deal was a resounding response to the ever increasing competitiveness in the industry. The drop in oil prices at the time, along with the need for efficiency forced, some of the major players in the market to seek tie ups. The most notable example was British Petroleum’s $54 billion acquisition of Amoco which created the third largest oil and gas company in the world.
The irony of this deal lies in the fact that it brought together two of the largest parts of John Rockefeller’s powerhouse Standard Oil Co., which was split apart in 1911 by the United States Supreme Court due to competition concerns.
When discussing a deal of such a large scale there will always be commentators who shout: ‘What about the consumer? How will he be affected by a deal that creates a huge monopoly that can dictate the prices in its own industry?’ That is exactly what the US Federal Trade Commission and the European Commission were concerned with when they heard about this deal. Needless to say, this transaction attracted heavy opposition both in the US and, especially, Europe. Under European Union competition rules, the Commission could veto transactions that strengthen a dominant position in EU markets even if the companies were from outside the EU. As a result, both Exxon and Mobil had to agree to dispose of large parts of the new business. Among the divestitures, Exxon agreed to scrap an option to buy gasoline stations from Tosco in Arizona, divest its Benicia, California refinery and its jet turbine oil business, and stop selling diesel fuel and gasoline in California under the Exxon name for at least 12 years. In total, 2,400 stations across the US were sold, making it the largest divesture required by the competition authorities. In addition, the merger resulted in 9,000 job losses around the world. In spite of the many hurdles, the deal was a huge success.
A decade later the ExxonMobil corporation made another significant leap, through a key acquisition of XTO Energy for a price of $31 billion. The ExxonMobil merger is a good example of the sacrifices companies need to make in their pursuit to be the best.
4. T-Mobile’s joint venture with Orange
The headlines: ‘Norton Rose joins CC on Orange’s T-Mobile merger’, The Lawyer, 8 September 2009
Who’s involved: Clifford Chance for Deutsche Telekom (parent company of T-Mobile UK) and Norton Rose for France Telecom (parent of Orange UK)
Why you should know about this: Has anyone noticed the lack of T-Mobile and Orange shops in the high street? Instead, you can often see a bizarre sign proclaiming ‘Everything Everywhere’. What you may have read in the press to be a merger between the two is actually called a joint venture. Put in other words, a business agreement between two or more parties made for a specific project in which the parties put equity and share the profits. Although sometimes hard to distinguish, it can be said that the main difference between a joint venture and a merger is that mergers are permanent and cover all areas of the business while joint ventures are designed for a specific project. Also, while in mergers the two companies form one, in joint ventures the two companies actually establish a new company in which they invest equity. This company is called a joint venture vehicle. ‘Everything Everywhere’ is the JV vehicle in this case.
The deal, which was finalised on 1 July 2010, created the UK’s largest mobile phone network with a 37 per cent share of the UK mobile market – overpowering Telefónica’s O2 (27 per cent), and Vodafone (25 per cent). According to lawyers acting on the deal, T-Mobile was being squeezed in the market by competitors and found it hard to keep up with technological developments. The introduction of fourth generation mobile technology was an investment that T-Mobile could not make on its own.
The most important part of the deal was said to be the network coverage advantages. T-Mobile and Orange customers could sign up for the free roaming service. Once registered, their phone will automatically switch from one network to the other when it loses signal. Moreover, this tie-up can be argued to be an effective synergistic alliance in its own part. T-Mobile and Orange have said that as a result of merging networks and information technology, shifting more distribution to their own shops, and cutting administration costs, annual savings will be generated of approximately €510 million from 2014.
The intriguing part of the deal was that it was initially intended to be a cashless transaction since both companies were believed to be of equal value. However, it was subsequently discovered that T-Mobile was actually worth less than Orange. As a result, lawyers had to find an innovative way to push the deal through. They used an instrument called a rebalancing loan as part of the arrangement to compensate Orange shareholders. France Telecom had to include £1.25 billion of intra-group net debt in order to equalise the value of the JV contributions. On the other hand, Deutsche Telekom had to grant a £625 million shareholder loan, used to reimburse £625 million to France Telecom to re-balance the transaction.
As a result, all 30 million T-Mobile or Orange customers are effectively now customers of the joint venture vehicle Everything Everywhere.