Appendix 6: What goes around comes around : Monday, 13 March 2017: (16:15)

Amec Foster Wheeler is John Wood Group’s main competitor. They are both multinational companies, headquartered in UK, are listed at London Stock Exchange and belong to FTSE 250 index. They operate in the same industry, their share prices usually meet each other (excluding the last couple of months) and have about the same revenue.

The reason a company exist is to increase its shareholders’ wealth, when a company A acquires another company B is expecting greater revenues and as a sequence greater dividends for its shareholders. When John Wood Group Plc decided to buy Amec Foster Wheeler’s all shares is expecting to exceed the amount of $12.3bn combined revenue. Of course an increased revenue does not mean higher dividends, at least for short term, since the company’s leverage is getting increased simultaneously.

The expected combined EBITDA is about $800m, almost double amount than what each company can achieve separately. Sounds quite attractive, however this ratio is not reliable at all. Is not taking into consideration the implications of payable interests and highly geared companies. When an acquisition take place the bidder has to take a very fat loan to pay the target company’s shares and to keep its own shareholders’ happy. The deal is set for a £2.2bn fully acquisition, added a 15.3% on the share prices as substantial premium for the AMFW’s shareholders’ persuasion. 

The bidder, WG, will join the economic gains from the combined operational synergies, which will be larger and more diversified, however it will sell some of AMFW operations. This acquisition is JWF’s mean for further growth, its pre-acquisition portfolio was based on oil and gas. Its post-acquisition portfolio will include renewables and mining services as well.

This horizontal takeover aims to fight with the commodities’ depreciation the last couple of years, its main strategy is to cut down its operational costs, £110m. Personally I think this takeover will be a huge failure since will be based on the upcoming shortcuts, firing its employees, in order to be able to pay its huge debts.

This type of policy doesn’t really work though. The company’s objective is to increase its revenue but at the same time is firing its employees who are its consumers as well. A policy that really does not make any sense. If its consumers are unemployed they will stop using cars, heaters etc. and as a sequence WG’s revenue will be decreased obviously!!! The irony is that WG’s chairman talks about customer relationship to support this takeover decision!!

I guess he doesn’t know that the earth is round, and as the law of cause and effect works: “What goes around comes around”.