Leasing Life’s Asset Finance Distribution Conference 2007, which took place in Brussels, raised a host of key issues. Over the next two pages Brian Rogerson reports on the key ones.
Industry consolidations continue apace as UK and continental European lessors seek to grow by acquisition.
Furthermore, many lessors and banks view acquisition as the best options for entering the recent accession markets of central and eastern Europe. The bullish economic climate to date has meant that companies are awash with investors’ funds awaiting investment in expansion.
However, as experience shows, the path of good intentions is littered with the remains of acquirer companies that failed to think the purchase through further than the stage of due diligence. To many chief executives the actual acquisition turns out to be the easy bit – and only then do the changes of a less-than-thought-through integration appear, and post-acquisition synergies fail to arrive.
Lindsay Town, managing director of asset solutions at Bank of Scotland Corporate, told delegates at the conference that: “There is no such thing as a merger; it is always a takeover to someone. There can never be a complete balance between the acquirer and the acquired companies. No matter how hard people try, integration is generally seen negatively – and one party will dominate.”
Town stressed that it is crucial for this imbalance to be recognised as early as possible and acted upon. If not the cost benefits of the integration will be jeopardised. “In acquisition terms,” he said, “two and two rarely makes five – it usually makes around three.”
Respecting cultural differences
Town believes that acquiring companies ignore cultural differences at their peril: “These cultural differences always exist even in closely-related businesses. It is crucial to recognise what they are and deal with them – or you will find they have teeth and can bite.”
Rita Jakusch, head of strategic business development at UniCredit Global Leasing (UniCredit), admitted that there was no absolute recipe for integration of differing cultures, but for a start: “You can get people talking to each other”.
“To build up a unified culture in a company that has expanded as much as UniCredit has in recent years,” Jakusch said, “it is crucial to have a set of joint values. The Integrity Charter is a set of values adopted and shared within the UniCredit group by all employees.”
Yves Mehaudens, head of business development and integration at Fortis Lease Group, stressed that it was important not to accept unrealistic expectations from integration.
“You should ask,” he said, “what are the expectations of the acquired entity. How does the acquisition bring a solution to the problems it was facing? What are the personal objectives of its staff in terms of career expectation, mobility and the bonus they may have been expecting?”
“For integration,” he said, “time is of the essence. You should set the pace and keep the momentum – even if it is disruptive. The integration objectives, which should be transparent and quantifiable, must be clearly outlined in an Integration Plan and endorsed by the whole organisation.”
“Although there is no magic formula for integrations,” Town said, “it is important for companies to set out their expectations as early as possible. Then they must track and lead performances – but not to make it a sub industry. In addition, it is paramount to get the right people in place from the start – anything else is unfair on the people and the business.”
Jakusch added: “Once integration has been successfully managed there begins a huge potential for growing and developing on the first results. You should aim at leveraging on current business and exploring organic growth opportunities – and ensure that growth initiatives are already in place.”
Key boosts its syndications
The syndication of loans – revolving credit facilities, term loans and junior debt instruments – has long been a feature of the traditional banking industry. In 2006, the largest arranger in the European market put together $79bn (£26bn) of loans across 112 transactions. The largest 10 players accounted for some £472bn of loans.
Andrew Slatford, European credit and risk director of Key Equipment Finance, said that lessors syndicate deals typically to generate fee income. “This of course,” he said, “represents a boost for return on assets or return on equity.”
“Secondly,” he said, “they do it to manage credit exposures. Internally, a credit application might have been flatly declined for risk reasons, or it could be a case of, say, $2m outstanding to a customer being acceptable – but $4m not – leaving a sales person at risk of losing that customer.”
A third reason is that many lenders have rules and exclusions which place a deal “out of the box”, or perhaps an extra level of approval required becomes a disincentive to keeping the transaction for a higher own-book exposure.
“Another typical reason”, Slatford explained, “is that the available price or margin on a transaction does not meet a lessor’s internal profitability or pricing requirements. Investors, however, may be attracted to the transaction at a price which still enables the originating lessor to satisfy a customer while extracting a fee or ‘skim’.”
Slatford stressed that lasting reciprocal relationships betweens sellers and buyers are founded on trust, transparency and teamwork. He said: “It is crucial to encourage dialogue and openness between multiple levels and functions of respective organisations. Also to foster a deeper understanding of each other’s philosophy, parameters and processes.” He added: “If lease syndication is to have a durable impact on market liquidity, trust is integral to its success.”