Recession is turning corporate foes into boardroom bedfellows

TWO fundamental factors allow any business to survive: profits and capital. Throughout the year, faced with a drop in revenue, businesses have responded by battening down the hatches.

Cutting costs in payroll, services and property is evident across the board. However, many CEOs cannot avoid the prospect of sustained losses.

Their day-to-day focus of growing revenue, maintaining margins and cutting costs won’t be enough to survive.

Where there are significant debts court-appointed examinership becomes a real prospect. Over recent weeks, household names such as clothing retailer Sasha, pub chain Thomas Reid and caterers Master Chef have all been forced to call in a liquidator or examiner. In Britain a similar fate has befallen Woolworth and MFI. This is just the beginning.

Recession makes corporate foes into boardroom bedfellows. The starkest example of this is Michael O’Leary’s latest attempt to buy Aer Lingus for €748 million. It’s remarkable that an offer of €2.80 a share was rubbished two years ago and now his revised offer of €1.40 a share is gaining serious traction.

Ryanair has sugared the pill this time. In a politically adept move it has promised the Government it will restore the Shannon-London twice-daily service, recognise the unions and give a Government veto over retaining Irish access to the Heathrow slots.

Whatever happens, the putative Ryanair/Aer Lingus merger is just the first of many. Nor are mergers and acquisitions necessarily anti-competitive. It’s not unique for customers to have one service instead of two. Many of us used to enjoy the Evening Press and the Evening Herald. Racing fans could read Sporting Life and the Racing Post. Supermarkets sell brand premium products and cheaper generics simultaneously.

The driving force for consolidation is the bottom line. Greater scale confers benefits through stronger purchasing power. You can negotiate better prices and credit terms. Synergies are obtained through amalgamation. If you advertise on Aertel, the national print media or radio, you can divide the cost over a greater number of outlets so the unit cost declines. Similarly, head office administration, human resource management and payroll can be done more efficiently.

This scenario now faces our banks. The IBOA says that if our six indigenous banks were reconfigured and combined, up to 3,500 jobs would be lost. This doesn’t mean bank customers will have a lesser service, just a less costly service. Customers want more accessible, cheaper banking. Such consolidation is not new. Irish Life and Permanent (ILP) is based on a merger of the TSB, Irish Life and the Irish Permanent Building Society.

This merger mania is not just for plcs. One only has to reflect on the news stories about Dunnes Stores. It is rumoured, after 64 years and two generations of family control, that ASDA/Wal-Mart are sniffing around Ireland’s largest supermarket chain. If the grocery retail pressures are such as to force a rethink by Dunnes, what must life be like for the rest of the indigenous retail sector? Supervalu, Superquinn, Centra, Spar, Londis, Daybreak, Gala, and Costcutter all have to consider their future anew.

Throughout the golden decade of growth from 1996 to 2006 there was a phenomenal increase in service capacity here. Orderly rationalisation is immediately required. Solicitors, accountants, architects, insurance brokers, travel agents, PR firms and car dealerships are going to have to think the unthinkable and combine forces with their local competition.

Health insurance has also seen a reconfiguration. The VHI had a State monopoly. Along came BUPA and then the smaller independent, Vivas.

Today, general insurance operators in the motor and property sectors have acquired these new entrants — Quinn Insurance and Hibernian, respectively.

I foresee virtually every sector of the Irish economy, post-recession, having three or four main players. This would include large-scale food manufacturing of dairy and meat produce as well as the print and broadcast media. The Irish population base of up to five million can sustain only a handful of strategic players in each sector.

An old business maxim says “turnover is vanity, profit is sanity”. Profitability may only be attained through consolidation. Ireland’s oldest and most original business icon has been Guinness. How many metamorphoses has it been through to end up as Diageo? Growth is the hallmark of business success. It’s better for the Guinness family to have 2% of a global empire rather than 100% of a deadbeat out-of-date brewery. Relinquishing family control to world-class management and opening up access to stock market capital can be the ultimate catalyst for business success.

The tyranny of the plc is perceived as predatory to independent entrepreneurs. It is inevitable that large Irish plcs such as CRH, Glanbia, Kerry Group, Smurfit Kappa and Aryzta will use the recession to gobble up smaller operators in order to fuel post-recession growth. Very few boutique niche businesses can repel the juggernaut of the plc. The real choice is not whether or not there should be consolidation but rather how to avoid Irish commerce becoming almost entirely foreign-owned. This is at the heart of the Government’s reconsideration of Ryanair’s latest bid for Aer Lingus.

If Aer Lingus cannot survive on its own as an independent regional and peripheral operator — and that is not yet certain — is it better that it is part of a multinational conglomerate that is based here or abroad? Ryanair can keep Aer Lingus Irish.

KLM/Air France seem disinterested.

WE long for the romantic shamrock maintaining the vital air access to our island. Deep down we fear we are at the mercy of the market. Once we have swallowed our pride, we have to face the future with new pragmatism. The politics of the situation is that Bertie Ahern’s umbilical cord to the unions has been severed. The biggest stumbling block is the effect on Dublin and Cork airports where there has been significant investment in new facilities. Given Ryanair’s record on landing charges, would it abuse its dominant position?

The Government, nonetheless, is not powerless. It should present additional demands to O’Leary: a higher price, guarantees to retain Irish headquarters and develop transatlantic routes would be good starting points. The reason Ryanair is so successful is because it is the lowest cost operator. Its in-flight efficiency, turnaround times, manning levels, online purchasing, ruthless negotiation with all suppliers and airports, along with its scale of operation makes it truly formidable. Aer Lingus can retain a separate premium brand under Ryanair control.

Thirty airlines have gone to the wall in the past year. Two weeks ago the stock market’s capitalised value of Aer Lingus was €500m, despite the company having cash on its balance sheet of €800m. The adage “if you can’t beat them, join them” does seem apt for Aer Lingus. It would be wrong to think that the board of our national flag carrier is in any different position to directors of Dunnes Stores, ILP or hundreds of other private companies across the country. Change or die.

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