Enough With the Big Corporate Mergers
European Straits #147
Hi, it’s Nicolas from The Family. Today, I’m reflecting on the love for big corporate mergers between exhausted incumbents—and why I think it’s not the right approach for Europe.
This is the week of the GovTech Summit in Paris! The initiative was launched to complement what our friends at PUBLIC (Daniel Korski and Alex de Carvalho) have been working on since 2017: growing tech startups that have the potential to upgrade public services and transform our government—a vertical that, I think, could become central in European tech in the years ahead.
PUBLIC is headquartered in London and is supporting startups in the UK, France, and Denmark. But the GovTech Summit itself is happening in Paris, which I think is a clever choice. You need participants from all over Europe, and Paris is quite central in many respects. It’s easy to travel there from anywhere. Also, with the UK about to leave the European Union, Paris is now where you can find the drive and willpower to grow ambitious tech companies with a truly European footprint.
I’ll be a panellist at the GovTech Summit tomorrow: If you’re around, you can come hear me talk about regulatory innovation with fellow panellists Jeffrey Schlagenhauf, Lone Saaby, Steve Wood, and my old friend Sébastien Soriano.
⚠️ Also, I just published my latest column in Sifted about the soon-to-be-fulfilled potential of GovTech startups. Read it here: Government is just another sector waiting to be eaten by software.
Meanwhile, I wanted to react to the many discussions that are currently going on about big mergers and the revival of industrial policy in Europe. Read along 👇
Merge Two Dinosaurs, You Won’t Get a Gazelle
1/ This week in Europe was marked by celebrations around the idea of big mergers. First, there was the announcement that Italy’s Fiat Chrysler and France’s PSA would merge to form the fourth largest car manufacturer in the world. This comes after a failed attempt by Fiat last year to gobble up what’s left of Renault in the aftermath of former CEO Carlos Ghosn being jailed in Japan. After last week’s announcement, you could sense the joy in the voices of most officials and commentators. Finally, big mergers are back and Europe will be able to play in the top league.
2/ Then there was also the announcement that Thierry Breton was Emmanuel Macron’s nominee to be the next French EU commissioner in Brussels. Per this article in Politico, Breton’s appointment is seen as good news by all those who want Europe to breed “European Googles and Verizons” 🤔😦. He seems to be fully in favor of orchestrating waves of mergers between European incumbents so as to have them compete at the highest levels. But as I wrote in my previous column in Sifted, I don’t think Breton is the right person to make Europe more competitive. As a sci-fi author, he’s interested in the distant future. And as a guy who is passionate about big mergers, he’s interested in salvaging the past. Alas, he's not nearly as interested in what we can (and must!) do in the present—that is, supporting startup communities and building up a pan-European ecosystem for them to thrive.
3/ The underlying context for these discussions is last year’s decision by the EU Commission to prevent a merger between the rail operations of Siemens and Alstom. If it had gone forward, the projected merger would have given birth to the railway equivalent of Airbus. But Margrethe Vestager, the EU Commissioner in charge of antitrust, and her team decided that it would give the proposed new behemoth an overly dominant position on the global market. And so the project was stopped, to the dismay of all those who have wet dreams about Europe breeding the biggest companies in the world. Vestager was instantly depicted as an enemy of Europe’s interests, ignorant in everything related to business, and the reason why we’re lagging behind the US and China. Macron himself has vowed “to recreate competition policy to avoid the mistake of the Siemens-Alstom prohibition”, and appointing Thierry Breton in Brussels seems to be part of that plan.
4/ I think it’s time we put the idea of merging big incumbents back in context. In the post-war period, the idea of industrial policy was all about Western European countries and Japan catching up to the US. At that time, the proper approach for followers was to erect trade barriers and provide state support to so-called national champions to help them grow to the point of being able to compete on a global scale. This type of industrial policy was a big thing in my home country of France. And we owe it the rise of nuclear power (that’s EDF), access to oil in Africa (that was Elf Aquitaine, which later merged with Total), and, in partnership with our British friends, the undisputed commercial success that is Airbus.
5/ But then the world changed. With the catching-up phase coming to a close, industrial policy reached the frontier and began to be distorted by conflicting goals. Suddenly it wasn’t about supporting high-performing, fast-growing businesses anymore, but rather about salvaging struggling companies that were bleeding cash and losing market share. The new industrial policy involved pouring a ton of taxpayer money into these companies to help them absorb the shock of restructuring. For example, this is when the French government forced consolidation of the national steel industry, sending most workers packing with generous pensions and then providing even more money under the form of subsidies so that the new management could try and keep the business afloat (which they mostly failed to do).
6/ Then came the next phase of reinventing industrial policy, which was triggered by the creation of the European single market. In 1986, the Single European Act was signed and ratified by all 12 members of what was then known as the European Community. It basically said that now most businesses would have to compete at the scale of the single market without member states intervening to support one company over the others. The taxpayer-funded salvage operation that had been done for the steel industry was now forbidden. But was that the end of industrial policy? Not really.
7/ Instead, everyone in the French establishment became passionate about big mergers. If the state was forbidden from subsidizing dying industries, at least it could try to revive them by orchestrating mergers between the biggest companies dominating those industries. It was all the easier because the state owned some of those companies, which it was eager to sell to private investors, and a merger was a good way to do that. This is when we had landmark operations such as Aérospatiale (state-owned) merging with Matra (private) to become EADS (now Airbus) in 1999, or GDF (state-owned) merging with Suez (private) to become GDF-Suez (now Engie) in 2005. Industrial policy became a long string of state-orchestrated M&A, which was another way of supporting struggling companies without spending taxpayer money. (Interestingly, more investment bankers became involved in government during this period, with figures such as François Pérol and, later, Emmanuel Macron.)
8/ Here’s the thing: I’m not against mergers in general. I think they were an understandable phase in a Fordist Age that had long reached maturity and was struggling to generate additional productivity gains. Just like leveraged buyouts, mergers were a way to revive exhausted businesses and to improve performance at the aggregate level. They also reflected markets opening up, the economy becoming more global, and the need for businesses to compete at a larger scale.
9/ The problem is that mergers have become a weapon used by incumbents to try and contain tech companies. As they face new entrants in every industry, at a certain point incumbents become determined not to let themselves fade away. They convince themselves that by growing larger through mergers and acquisitions, they will be able to contain the power of fast-growing tech companies eating their value chain and thus preserve the status quo. It was because record companies were trying to regain the lead over Apple and YouTube that the number of major record labels went from five to three in the space of ten years. Likewise, it was with the goal of counterbalancing the likes of Google and Facebook that Publicis once considered a merger with Omnicom, its main competitor on the global advertising market (it didn’t go through).
10/ And so, are mergers still relevant? Not so much. In the Entrepreneurial Age, the most competitive organizations are those which are agile and able to constantly reinvent themselves. They are also (and above all) outward-oriented organizations obsessed with the continuous improvement of the user experience. And in this context, mergers are a problem. They contribute to organizations retreating into themselves: implementing a merger forces managers at all levels to focus their attention on restructuring the organization and redistributing managerial positions. And a merger plunges the resulting entity into a frantic race to eliminate redundancies and reduce costs, which contributes to stiffening the organization and making it even more rigid. As William H. Janeway says, innovation is all about waste, thus “efficiency is the enemy of innovation”.
All in all, I think our passion with bigness is misplaced at best, and dangerous at worst. I wrote a thread (in French) a long time ago about that topic, which my colleague Kyle Hall and I hastily translated here: The end of BIG. But to make it short, my view is that big is not the point. What really matters is how you get there—and clearly corporate mergers between big, exhausted incumbents are not the right way. When you merge a dinosaur with another dinosaur, it never gives birth to a gazelle!
Please scroll down for interesting readings about big mergers and industrial policy.
🙅♀️ My firm The Family has always stood against the idea of startups raising money from the government (whether via subsidies or tax credits). I once wrote an issue of this newsletter about this very topic. But my colleague Hugo Amsellem just nailed our vision with a fun and educational thread that you can read here: A few reasons why public money is—more often than not—a bad option for startups.
💰 My colleague Pietro Invernizzi helps companies raise their Series A through our AAA program. Too often founders think that raising a Series A is the mere continuation of raising a seed round. And because of this misunderstanding, they end up not clearing the bar, screwing up their fundraising. Pietro’s latest article makes the case that there’s a radical difference between those two stages. Read it here: 9 reasons why Series A is not “just a big Seed round”.
Here are more readings about industrial policy in general and big mergers in particular:
Here’s how United and other airlines became atrocious behemoths (Philip Longman & Lina Khan, The Washington Monthly, March 2012)
The Two Innovation Economies: Follower and Frontier (William H. Janeway, April 2013)
The End of BIG (me, November 2014)
The Five Stages of Denial (me, The Family Papers, May 2016)
Outsiders are piqued by French management cliques (Harriet Agnew, The Financial Times, April 2017)
Mergers of old-media titans miss the point (Rana Foroohar, The Financial Times, March 2018)
Mission thinking: a problem-solving approach to fuel innovation-led growth (Mariana Mazzucato, UCL Institute for Innovation and Public Purpose, March 2018)
How Europe can punch back at Beijing and Washington (Tom Enders, Politico, April 2018)
Macron’s Industrial Policy: More of the Same? (me, my newsletter European Straits, April 2018)
It is a mystery why bankers earn so much (John Gapper, The Financial Times, July 2018)
Europe’s history explains why it will never produce a Google (The Economist, October 2018)
The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy (Reda Cherif and Fuad Hasanov, International Monetary Fund, March 2019)
The Coming Boeing Bailout? (Matt Stoller, BIG, July 2019)
A Modest Proposal: A Backdoor Implementation of Free-Market Industrial Policy (Byrne Hobart, Medium, August 2019)
Macron strikes back with his champion of champions (Simon Van Dorpe, Politico, October 2019)
Plunging Peugeot Shows Who the Buyer Is in Merger of Equals (Tommaso Ebhardt and Ania Nussbaum, Bloomberg, October 2019)
From London, UK 🇬🇧