Anthony Hilton looks at the reasons preventing companies from successfully merging
' The surprise about the collapse of merger talks between Chaucer and Amlin is that there is anyone left to be surprised. There have been so many unsuccessful attempts to merge Lloyd's companies into bigger units that the real wonder is that the management of two of the best run businesses - which these are - should still think it was worthwhile looking into the options.
The reason no one gets anywhere is that the case for bigger units is rooted in finance not business. As argued by Michael Wade, who has surely tried harder and longer than most down the years to put Lloyd's business together, the main benefit is that the bigger group would be more attractive to city investors. The current market capitalisation of Lloyd's businesses even at the top end where one finds Hiscox and of course Amlin itself, is still too small at under £1 billion to allow big institutions to buy in the size they would like. So they shun the sector, and as a result the companies do not have access to capital at the price and in the size they would like to optimise their business.
Now while this is no doubt true in theory, it does rather jar with reality. The fact is that insurance companies have been able to grow to huge size without access to the stock market. The whole mutualisation movement demonstrated that, not just on the savings side where Standard Life still dominates the space but in mainstream insurance. Witness the success and size of Norwich Union before it decided to go public. Mutuals may have issues of governance and may not always be the most efficiently run, but they have got to a huge size before being constrained by capital.
The other issue surely is that the record of the city in calling the insurance cycle and providing capital when it is needed is not good. Look at the fuss they made and have continued to make over the Prudential rights issue and the shareholders demand for the head of the then chief executive Jonathan Bloomer, in spite of the fact that the money he raised has delivered a pretty good return. At the other extreme look at the support they have given successive managements of Royal & SunAlliance when. With hindsight, it is plain to see that many of those past managements did not deserve it. Does one really believe that these fund managers would be lining up to thrust money into the hands of the insurance companies at the bottom of the cycle when they are all struggling to show any profit at all, and telling them to scale back their operations at the top and return capital to shareholders? And if so, given most of the industry cannot predict the timing of the cycle, what are the chances of these outsiders getting it right? Surely it is much more likely that they would behave like lemmings, waiting until they saw the profit before they committed the capital and therefore arguably making the cycle worse.
Truth is most fund management organisations can barely run their own businesses let alone tell other people how to run theirs, which is why they have become so obsessed with the time wasting and value destroying rituals of corporate governance as a substitute for leadership. People say the problem is the egos of the top people and their unwillingness to cede power in a merger. That however is true everywhere. A far bigger issue is the difficulty of getting the key people who work in the organisations to be comfortable in the new structures. There are very few examples anywhere of people businesses maintaining their zest for innovation when they grow by acquisition. Inevitably the
hassles which arise in trying to combine the accounting and other systems mean the business becomes process not practitioner driven - and process is the death of flair.
The other negative is that the business case does not obviously stack up. If two companies are writing 10% of a slip, they will not write 20 per cent of it, let alone 25% when they are combined. Far more likely they would be cut back to 15%. That means the merger will most probably be justified by the promise of cost cuts, such as the chopping of staff. Setting to one side the devastating affect on morale that such plans often have, the reality is that they rarely work. The savings seldom come through as promised and are too often offset by additional costs elsewhere. None of this is rocket science - indeed it becomes obvious to people when they have actually to get down to the detail of planning a merger. Then what they find is that the current business model works, and there is no compelling reason to change it.
' Anthony Hilton is a columnist with the London Evening Standard