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The Urge to Merge?

After the crash of the boom, is the collapse of the great merger boom the next crisis facing U.S. business?

April 15, 2002

After the crash of the boom, is the collapse of the great merger boom the next crisis facing U.S. business?

The evidence on the flaws in mergers and takeovers is so clear that one wonders why anybody tries to initiate them. Quite simply, the company taking over — on average — does not actually make any money from the transaction.

Worse yet, most of the gains to be made from the takeover accrue to … the shareholders of the company which is being taken over. (This means, presumably, that the retiring executives of those companies — such as Chrysler’s Bob Eaton — ride off into the sunset burdened with their new-found riches.)

Dave Packard, co-founder of Hewlett Packard, put it this way: “More companies die of indigestion than starvation.” It is no wonder, then, that more than one-third of the largest international takeovers of recent years are now unraveling.

Under those conditions, just why would any company bother to try to take over another? In the absence of some very, very compelling reason for a takeover, it would seem to always be preferable to pick up market share — or expertise, or whatever the merger is supposed to obtain — via some other method.

And yet, for an entire decade, U.S. CEOs have plunged headlong into the takeover market. In so doing, they created little more than headaches for their employees, latent risks for their company — and fat fees for their investment bankers, other advisors and themselves. Come to think of it, this last point might just explain why CEOs were so ready to go the merger route.

Unfortunately, the problem created by the ill-fated urge to merge is that these joined companies are often more fragile than they might otherwise be. Then, add a recession on top of it. A company can quickly find itself in a weak position — and forced to blend two different labor forces and cultures in order to stay competitive.

Worse, mergers often leave a company awash in short-term debt taken on to finance the transaction. Thus, companies are left trying to restructure their finances — and simultaneously attempt to rationalize a mish-mash of product lines and operations.

There may have been a “crown jewel” that made it worth buying the company in question, but the rest of the purchased company must then be disposed of quickly — or managed for maximum profit as well.

Fixing any of these problems is difficult enough to tax even the most brilliant CEO. As a result, the company and its shareholders are left to struggle under the burden of debt. It would be better if managers were better able to resist the siren song of greater riches through mergers.