12 August 2016 | Graeme Davies
Merging two businesses, even complementary ones, is never straightforward, writes Graeme Davies.
Merging two businesses, even complementary ones, is never straightforward - there are plenty of examples through history of poorly executed mergers that have destroyed shareholder value.
And no two mergers are the same. With some it is clear relatively quickly where the benefits are being gleaned; others take longer to show through. A first anniversary is a suitably arbitrary time at which to judge a takeover's initial success, but in the case of Kier’s takeover of Mouchel just over a year ago, the tangible benefits are now showing. The company says it has completed the process of integrating the two businesses and that the Kier Workplace Services business is now a fully formed standalone division of the group.
Its progress bodes well, with investors impressed that management appears to have succeeded in taking more costs out of the business than previously expected. Indeed, integration benefits will receive a £5 million boost and are expected to run to £15 million a year from next year. And, for a company such as Kier, acquiring and beefing up its services business has the added benefit of diversifying the group away from the more cyclical construction markets where it has previously concentrated its activities and should mean that earnings become steadier as long-term contracts contribute.
But Kier's environmental services business has suffered from the low oil price environment, which has fed through to lower pricing for recycled materials. Such issues mean a £35 million hit will be taken in this year's accounts against the environmental arm of the business. Elsewhere, Kier is selling off its Caribbean construction operations and the Mouchel Consulting business to redeploy capital in more appropriate growth areas.
At its half-year results in March, Kier booked £26 million in additional costs related to the takeovers of Mouchel and May Gurney. But Kier has created a more diversified and resilient business that should begin to show the fruits of the merger from next year onwards as the greater scale of reach of the Kier business should take the company to places that it has been unable to reach before, making the short-term paper-based pain all the more bearable for management and investors alike.
Graeme Davies writes for Investors Chronicle