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The Urge to Merge?

In a post-Enron world, do we need further accountability regarding corporate mergers?

April 24, 2002

In a post-Enron world, do we need further accountability regarding corporate mergers?

The accumulated wreckage from unsuccessful mergers and acquisitions is so convincing that one wonders why anybody keeps trying to make them work. Quite simply, the company taking over — on average — does not actually make money from the transaction.

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

Dave Packard, the 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 trying to take over another? In the absence of some very, very compelling reason for a takeover, it would seem to be always more 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, CEOs across the United States have plunged headlong into the takeover market. In so doing, they have created headaches for their employees, latent risks for their company — and fat fees for their investment bankers, other corporate advisors and themselves. Come to think of it, this last point might just explain why CEOs are so ready to go the merger route.

Most conspicuously, the biggest problem created by the ill-fated urge to merge is that the new company is often more fragile than its predecessors. Then, add a recession on top of that. A company can quickly find itself in a weak position while it is 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 required to finance the transaction. Thus, companies are left trying to simultaneously restructure their finances and a mish-mash of product lines and operations.

Perhaps a “crown jewel” made it worth buying the company in question, but the rest of the purchased company must either be disposed of quickly — or managed for maximum profit.

Fixing any of these problems is difficult for even the most brilliant CEO. As a result, a company and its shareholders are left to struggle under a burden of debt. If corporate executives were made more accountable it might be easier for them to resist the siren song of mergers.