4 Monstrous Deals that Fell at the Final Hurdle

10 August 2016 -

Negotiation is a complex art, and when things turn sour at the eleventh hour it is often bad management that gets the blame

Jermaine Haughton

Hinkley Point C Nuclear Power Plant

Despite years of preparation and negotiation, energy bosses have been left frustrated by UK Prime Minister Theresa May’s postponement of the new Hinkley C nuclear plant raising fears about the future of Britain’s energy sector and trading relations with China.

Set to be the first UK nuclear plant in 20 years, French energy company Electricite de France SA (EDF) was set to build Hinkley Point and its two reactors in Somerset along with Chinese government-backed firm CGN, who hold a 33% stake in the power plant.

Projected to satisfy about 7% of the U.K.’s power demand and power around five million homes, the plan for Hinkley Point was set to be confirmed on July 29, with contracts prepared and a celebratory lunch for 150 VIPs already organised, before May pulled the plug.

What went wrong?

Despite the deal running relatively smoothly over the past 18 months, with Chinese and French parties agreed on the deal, the change in the UK political landscape has led to a review of the plans.

While predecessor David Cameron and former Chancellor George Osborne showed enthusiasm for the £18bn project, sources close to May’s cabinet have reportedly expressed concerns that the nuclear plant is too expensive and will saddle consumers with billions of pounds of extra costs for a generation.

Also, Tory chief of staff Nick Timothy has previously raised worries of national security, were the Chinese to compromise Britain's energy supply in future.

Management Insight

Although bosses involved in the project could hardly foresee the changing political landscape in the UK today, the sensitive nature of Hinkley Point, and its potential impact on the British economy probably required a longer thought process and greater scrutiny in its planning to allay the fears raised.

In particular, promises made by Osborne to Chinese investors last year that their investment in Hinkley Point in Somerset could lead the way to Beijing building its own reactors across Britain, has led to some suspicion over the scale of Chinese involvement.

While, on the other hand, if Beijing were to get the signal from London that it was no longer welcome to build its own nuclear power stations in the UK, China might question its investment in other industries in the country.

Failed Media Supermerger

Originally heralded as the merger of two giant corporations of equal standing, the $35bn merger of US-based Omnicom and France's Publicis failed to live up its potential of allowing both firms to compete more effectively in the digital communications industry.

But by May 2014, the proposed merger collapsed before completion.

What went wrong?

The battle for control of the new merged company was a clear breaking point for the mega deal.

The leaders of Publicis Groupe and of Omnicom were unable to resolve a power struggle over how the new entity would be managed. Everything from how positions should be filled to the way the firm's management would split became a competition, and both companies worried that they were losing their "equal partner" status.

On top of raising tension and infighting, some clients were also being scared away, with more than $1.5bn in major projects reportedly being lost in the month before the merger negotiations ended.

Management Insight

The failed Publicis-Omnicom merger shows how bosses must consider the importance of a merger’s impact on the company culture of each party.

One of the biggest reasons the merger failed was the inability of the two separate entities to come together effectively.

Both corporations have a leading position in the advertising sector with multi-billion pound revenues and global workforces, but there were large differences of opinions about how the new firm should be run, what the corporate culture would be like and how leadership might change.

Energy Future Holdings Bankruptcy Plan

Formerly known as TXU Corporation, Energy Future Holdings (EFH)’s first attempt to exit from its bankruptcy in 2016 collapsed in the final stages.

In the $10bn deal for EFH’s assets by its creditors, including BlackRock, Centerbridge Partners, and Hunt Consolidated, EFH had planned to sell its Oncor power distribution business for about $19bn, but the deal fell through in May.

What went wrong?

Two years ago, the company was forced into bankruptcy by weak electricity prices and was $42bn in debt, much of it taken on to finance a leveraged buyout of what was then known as TXU Corp by KKR & Co, TPG Capital and an affiliate of Goldman Sachs.

In response, EFH proposed the complex Oncor deal, which involved converting it into a real estate investment trust, which resulted in more than a year of expensive litigation over the best path for getting Energy Future out of bankruptcy.

But EFH was unable to meet the deadline to complete the deal on April 30, and was cancelled when investors spoke up against the acquisition.

Management Insight

EFH’s struggles to escape its financial woes, follow its decline over the past decade since it was purchased by Kohlberg Kravis Roberts, TPG Capital, and Goldman Sachs’ private equity arm.

Eileen Appelbaum, Senior Economist at the Center for Economic and Policy Research, explained that the firm’s struggles highlight the substantial risks bosses pose by using the private equity model.

“The truth is that the cards were stacked against EFH in the first place because the private equity owners loaded the company with almost $40bn in debt. EFH’s bankruptcy reveals the inherent risks of the private equity model - even when firms seem to do everything right,” the co-author of the book Private Equity At Work: When Wall Street Manages Main Street said.

“The excessive debt used by private equity firms in a leveraged buyout puts the company at great risk of default and bankruptcy, no matter how welcome the takeover or how well private equity works with the company’s other stakeholders.

“The private equity consortium did many things right; they knew they had to build a political constituency to support the takeover. And they did. They consulted with a broad swath of local groups and negotiated in good faith with the union that represented many of the company’s workers. The firms met with environmentalists, local and state legislators, community groups, and even businesses to win their blessing.”

Pfizer Walks Away From Allergan Deal

In another mega merger, pharmaceutical giant Pfizer and Irish competitor Allergan were set to unite in a $160bn deal, which would see the US’s biggest drug company move its headquarters to Ireland, subsequently lowering their tax bill.

If successful, Pfizer could have saved some $35bn in taxes owed thanks to Ireland’s 12% corporate tax rate. In the US, the corporate tax rate is 35% and, according to the Wall Street Journal, Pfizer had planned to move its headquarters to Ireland after buying Dublin-based Allergan, though it would keep its core management operations in America.

What went wrong?

In April, as the move seemed close to completion, Allergan and Pfizer ended plans to merge after President Barack Obama and his officials in Washington issued new rules to stop companies from moving overseas to avoid taxes - known as tax “inversion”.

One ruling stated that there would be a reduction in the ability of foreign business to become eligible for inversions by not counting recent purchases of US companies towards a deal.

Another would limit a business’ ability to accept loans from their foreign parent companies and deduct interest payments on them in order to pay fewer taxes on profits from the US.

Management Lesson

Stay on the right side of the Government and regulators.

Pfizer's CEO Ian Read repeatedly explained that the proposed merger was about much more than just tax savings, but mainly growth and opportunity in the pharmaceutical market. He once stated: "This deal is not just about tax benefits. This is about great franchises.”

However, just months after the US Government its new corporate tax regulations, the certain-looking Pfizer-Allergan deal fizzled away, suggesting the tax-saving opportunities were a bigger attraction to both parties than either would like to admit.

And in a deal which was set to be the largest corporate “inversion” ever, the main management lesson is that attracting unwanted attention regarding the practices and motives of your firm can gain the spotlight of regulators and government, who can quickly hamper any business deal.