JC Flowers, the Private Equity house based in New York, has agreed to pay GBP50m for a 49% stake in a Joint Venture with Kent Reliance Building Society (KRBS).

Does JC Flowers see KRBS as a major business opportunity? Hardly, because KRBS has only one branch and 45 employees. So it is definitely not in the multi-billion dollar league in which JC Flowers normally plays.

No, JC Flowers has done this deal for one reason only – to get cheap, fast access to a banking license. Whilst the “Grumpy Old Men” (Peston’s name for the group of banking industry veterans who have clubbed together to form a company to buy bank branches which the big4 are being forced to sell) are applying for a license from scratch (although with special dispensation from the UK Financial Services Authority which allows the group to bid for banking assets at the same time – so the outcome of the license application is pretty clear), JC Flowers has bypassed this.

A UK banking license is a valuable commodity. Under EU legislation, banks are now able to “passport” the licenses throughout the EU, obviating the need to apply for a license in each member state. So the moment the JC Flowers / KRBS deal is closed, JC Flowers is able to use this vehicle to provide banking services throughout the EU.

Should banking licenses be available in this manner? Or should there be a requirement that any significant change in shareholders or executive officers triggers a review of the license, and possibly a requirement to repeat (a subset of) the application process, forcing would-be bidders to think very carefully?

For sure the banking regulator can revoke a license, but this is a very serious and very public course of action, and exposes the regulator to unwanted public scrutiny of its approach. Refusing to grant a license initially, or postponing this until further requirements are fulfilled, is much easier.

Here at Vox Sapiens, we have concerns that there is a route to bypass the hoops that must be jumped through to obtain a banking license, thereby increasing the risk of problems in the banking industry. And we know what havoc these can cause.

So it looks like SAP is going to buy Sybase, database vendor. But SAP is paying a lot of money for the company placed fourth in its main market. The price per share, at USD65 and a 44% premium to the pre-announcement price, hearkens back to the mid-1990’s when Sybase was still considered a serious competitor to Oracle, IBM, Ingres (another decliner), and Microsoft was not taken seriously as an enterprise computing vendor.

Here at Vox Sapiens we are not sure this is the right move for SAP. Firstly, Sybase is probably a poor choice at virtually any price. But there is plenty of commentary available on this elsewhere on the web.

So instead, here at Vox Sapiens we will discuss the company that SAP should have bought. And that company is Software AG (or “SAG”).

SAG is the second largest German software vendor, after SAP. The SAG headquarters are in Darmstadt, just south of Frankfurt and only 70km (45 miles) north of Walldorf, the home of SAP. There would be huge cost synergies achievable in a very short timescale. In fact, on cost synergies alone SAP has a huge advantage over any other potential acquirer of SAG. Furthermore, the market capitalization of SAG is approximately half that of Sybase pre-announcement, making it easier to swallow.

But more importantly, SAG is probably a much better fit strategically.

Sybase brings two things to the table: a database and mobile computing capability. What can SAP do with these?

Well the mobile capability is interesting, and fits with SAP’s strategy of moving access onto mobile platforms. But there are plenty of small companies with this capability that SAP could snap up at a fraction of the price of Sybase.

And the database is really no big deal at all. SAP has alliances with the three bigger database vendors, alliances that allow the SAP application(s) to work on these databases. And existing customers are highly unlikely to be persuaded to switch databases just because SAP owns Sybase. The cost of switching will be very high, and it is 99.99% certain that the former database couldn’t be eliminated entirely from the enterprise because other applications would be using it.

Furthermore, selling the SAP application to existing Sybase-only customers is unlikely to be significantly affected by the acquisition. The Sybase database sale is a very technical one, the key customer contacts are the CTO and the database specialists. Contact with these people will not give SAP the links to the senior executives to whom SAP would try to sell the application.

And SAP already has a database for customers that don’t have or want one from the leading three vendors – it is called MaxDB and is based on technology developed by … Software AG. MaxDB is actually a modified version of SAG’s ADABAS D database, licensed by SAP. So there are big opportunities here for cost synergies and for modifiying MaxDB even more to meet SAP’s requirements. ADABAS D should not be confused with ADABAS, another SAG database, and another leading technology that is closely linked to SAG’s Natural programming language.

An issue with the SAP application that many customers raise is the difficulty to integrate it with other applications. Many customers have to buy middleware, business process management (“BPM”) and other similar technologies to facilitate this integration. SAG bought webMethods in 2007, a company that produces middleware of the same name. SAG has also recently bought IDS Scheer (which created the ARIS enterprise modeling approach) giving it even more presence in the BPM market, and also a presence in SAP consulting. With webMethods and IDS Scheer, SAG presents a bundle of technology that SAP needs and can’t find in plenty of other companies as is the case with Sybase’s mobile technology.

So yes, at Vox Sapiens we believe that SAP has missed a trick. It should have bought Software AG.

So Renault-Nissan and Daimler have agreed a cross-shareholding and cooperation on future technology. Here at Vox Sapiens we are not optimistic about this alliance.

Firstly, this seems very one-sided. New emissions standards is forcing Daimler to develop its small-car models (smart, A-class, B-class). So far it has made a right pig’s ear of anything below its C-class range, and is desparate for a partner that can help it. So this deal, if successful, helps to dig Daimler out of a big hole.

But Renault-Nissan have no similar burning platform. Both businesses will need to continue to cut costs to remain competitive, and one route is co-development of technology and even shared production. This agreement supports this option, particularly through Daimler’s engine technology contribution. But Renault-Nissan already has a lot of the necessary expertise in-house. Daimler’s engineers will add value, but not to the extent that Renault-Nissan adds value for Daimler in the small-car areas.

Second, the management’s comments don’t sound too confident about making the alliance work.

“The main difference is … that with Chrysler, we agreed on a merger but had no ideas about areas of collaboration, … This is just the opposite of what we did with Chrysler and I am very optimistic that the outcome will be the opposite as well,” Dieter Zetsche, Daimler’s chief executive, said.

OK, so this time Daimler is out of first grade. But second graders are not that mature. Will a 3.1% equity stake really be enough to influence Renault or Nissan as a shareholder? Probably not. And does a change in the value of a 3.1% shareholding in Renault and Nissan have a major financial impact on Daimler? Once markets recover, probably not. So getting value out of this deal is all about being able to influence the technical guys to work together. Daimler couldn’t do this when it owned all of Chrysler. What has happened in the intervening period to show that it can do it now, especially when it doesn’t have the management control to force cooperation?

And thirdly, and this concerns us greatly as another unknown for Daimler, the French government is able to control this agreement. Just this week, Christian Estrosi, the industry minister said: “It is a very strong undertaking of the French president that from now on the state will take part … in the industrial strategy of Renault.”

Wow ! Not much requirement to read between the lines there.

Although a senior government official tried to assuage concerns by saying “We will have our say about Renault, but not about Daimler,” we don’t see how having a say about Renault’s participation in this agreement can not impact Daimler.

Earlier this year the French government appeared to alter Renault’s manufacturing strategy by blocking the transfer of Clio production from France to Turkey. What happens if the Daimler-Renault-Nissan alliance plans to produce a co-developed engine outside France during the next economic downturn?

And the French state will buy 0.55% of Renault as this agreement dilutes its stake and it drops below the 15% required to meddle to the degree that it wishes.

We will sit, watch and wait for the tears.

So McClatchy Newspapers has discovered that in late 2007 some analysts at Moody’s Investors Service were “downsized” for expressing concerns about the accuracy of the ratings being applied to some of the CDOs (collateralised debt obligations), especially those comprising MBSes (mortgage backed securities).

The news group alleges that Moody’s shuffled its internal employees, sidelining and/or firing those that were raising red flags and replacing them by structured finance specialists, in order to continue to provide the high ratings needed by the Investment Banks that were assembling the CDOs (see this story). The allegations are supported by quotes attributable to several former employees.

If true, the allegations reveal a deep weakness in the debt valuation process.

The story ends with the comment:

The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.

Experts such as Columbia University’s [finance expert, John] Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they’ll remain “just one more conflicted gatekeeper,” and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained,” Coffee said.

As somebody involved in the equity valuation process, I find this absence of responsibility quite shocking.

In the equity valuation process, an analogous process to debt ratings would be VDD, or vendor due diligence. VDDs are employed to reduce disruption to a Seller’s business. For example, if a Parent company wishes to sell one of its business units (the “Target”), then every potential Buyer would wish to dispatch its own team of analysts to perform (buy-side) due diligence on the Target’s finances, including interviewing management representatives from the Parent and Target.

The VDD approach means that only one team of due diligence analysts is encamped at the Target, preparing a due diligence report. The Parent company contracts the due diligence provider, and pays for the work, and often attempts to suppress any negative commentary about Target business. However, when the transaction is completed, the vendor due diligence report is assigned to the successful Buyer, and the due diligence service provider assumes a duty of care to the Buyer.

This approach focuses the due diligence service provider’s mind on preparing an objective and factual report when confronted by the Parent company management’s intimidation.

This is very different to the “under no legal obligation since technically their job is only to give an opinion” scenario in which the debt rating agencies work.

Isn’t it time that the users of debt ratings demanded that the ratings agencies become more accountable for their “opinions?”

Every report on the state of mergers and acquisitions points out that a proportion of mergers fail to deliver the intended benefits. Similarly, reports on the success of projects convey a similar message – some projects fail. Mergers are amongst the largest and most complex projects that companies must implement, and are not ‘run of the mill’ for most companies, so shouldn’t we expect mergers to fail – at least until we can implement projects successfully?

Disclaimer – I am a management consultant and spend a large proportion of my time advising clients on the strategic and operational aspects of mergers and carve-outs. I have written this post without intending to sell my capability and/or services (I haven’t disclosed the name of my employer, for a start) but readers might want to bear in mind my position.

So companies are not very successful at implementing projects. Over the years the reported success rate has improved, but the proportion of failures is still shameful.

What is a merger if it is not a project?

Mergers are just projects with tighter than average timescales, more politically-charged than average environments, broader than average scopes, more than average interdependencies, less well-defined than average requirements, and higher than average public scrutiny. In other words, they are more complex than average projects.

So we should expect mergers to fail at least as frequently as the overall rate for projects, and probably at a greater rate due to the high complexity. Although the share of executive attention means that maybe there is more ground-level motivation to make the merger a success that may work against this.

OK, so maybe we should expect some mergers to fail. So what? The point of this blog post is what exactly?

Well the simpler reason is just to point out that preventing the failure of mergers will not be a simple task – without solving the problem of why projects fail.

But the main (and hopefully more perspicacious) reason is to prompt the consideration of project failure in more detail within the context of mergers. Presumably if we know why projects fail, we should be able to introduce measures to avoid the failure. And we should be able to apply the same approach to that subset of projects called mergers, assuming the measures applied are applicable to all projects. I will return to this idea, and discuss possible responses, in subequent posts.

And carve-outs? Well they are probably even more difficult because the deadlines are legally driven.

The media report that General Motors was loathe to sell (a full or partial stake in) its European Opel operations to the Magna consortium because it is concerned that this will provide a conduit via which GM’s intellectual property (“IP”) might end up in the hands of GAZ, a competitor to the Chevrolet brand in Russia. Today the media report that GM has agreed to sell to the Magna-led consortium, but that there are conditions attached to the sale. I find this approach somewhat strange, and wonder whether it is a smokescreen.

We also read media reports that Ford is concerned about the possibility that a Chinese company (Geely being the most commonly quoted) might buy (a stake in) Volvo Cars as a mechanism by which to acquire automotive IP. Furthermore, Ford is reported to have concerns about Magna, which is one of Ford’s major suppliers too, owning a rival to Ford’s European operations (although Reuters reports that Magna co-CEO Donald Walker recognizes the need for “a clear barrier between the parts and car companies”).

For many years, the greater portion of automotive IP has not been developed and owned by the OEMs. Most IP sits in the supply chain. The OEMs work with the suppliers to define requirements for new parts, and the suppliers develop the IP as part of their work in producing these new parts (in fact, the failure to take advantage of this situation is one key reason behind the weakness of many suppliers, but that’s a story for another blog post).

The skills and knowledge in the OEMs revolve around:

1. Supply chain management – managing a cascaded supply chain of hundreds of suppliers providing tens of thousands of components is an enormous challenge. There might be some program management IP here, but very little automotive product IP.
2. Sales and marketing – the OEMs have done a great job of keeping their suppliers’ brands out of the general public’s awareness. Whereas, for example, Dell and HP have been unable to resist the “Intel Inside” initiaitive, the OEMs do not have to contend with “Denso Inside” or “American Axle Inside” or “Bosch Inside” slogans. As a result, only the automotive afficionados are interested in the source of components when buying a car.
3. Channel logistics – predicting demand, having the right models, with the right attributes (engine size, color, extras, etc.), in the right place at the right time. The performance of the Detroit 3 in this respect might also be the subject of another blog post.

So why do I think this is a smokescreen?

1. It is very difficult to protect product IP – your competitor only needs to purchase your product and dismantle it to discover 99% of the product IP that is embedded in it. Process IP is another matter, of course, but …
2. Russian tax laws make it advantageous for OEMs to supply CKD/SKD kits that are reassembled in Russia (whether this is the approach taken for Chevrolet and/or Opel vehicles, I don’t know), making it easier to determine the later-stage process IP. Furthermore, more assembly process IP can easily be obtained by luring away two or three key personnel.
3. Opel is the technology source for GM’s small car platform, which possibly represents GM’s future growth strategy. Does GM want to risk this strategy by releasing ownership of the technology to another industrial player?
4. Without Opel, GM ceases to be a global company. In particular, Russia is a market with a huge potential. And if GM loses control of Opel, what prevents the new owner targetting Russia and seriously affecting Chevrolet? At present, GM has the opportunity to ensure that Opel and Chevrolet present complementary product ranges in the Russian market; a new owner for Opel is likely to ensure the establishment of competitive product ranges.
5. By selling to a financial buyer, GM has the opportunity to buy back into Opel at a later stage when its finances are in better shape. Would an industrial owner be prepared to sell (at a realistic price)?
6. Magna, as the owner of Opel, will obviously become the preferred supplier to Opel. With Opel and the remainder of GM sharing many components (especially for the new small car platform), this gives Magna immense additional leverage over the remainder of GM.

Why might GM have a point?

In the interests of balance, here are some reasons why GM and Ford might be right to be concerned.

1. Shanghai Automotive Industry Corp (SAIC) bought the rights to the 25 and 75 models when MG Rover Group collapsed (it bid for the entire group but lost out to Nanjing Automobile). SAIC then transferred the assembly from UK to China where the same cars are assembled at a lower cost (see this Reuters blog). GM and SAIC have a joint venture, so maybe GM has seen at first hand some of the tricks used to transfer IP.
2. A Magna-owned Opel may be less concerned about IP for Opel components being utilized for parts destined for other OEMs, because the benefit still accrues to Magna