Hd Must They Merge?
Merger mania has taken on almost surreal proportions as of late. Combining one behemoth with another has made for some staggering deals, such as SBC Communications and Ameritech ($62 billion), Daimler-Benz and Chrysler ($38.3 billion) and Citicorp and Travelers Group ($70 billion).
Last year at this time, there had been $260 billion worth of deals transacted; this year, there’s already close to a trillion dollars of transactions in the pipeline.
The question is not so much whether these giants have a legal right to merge. Even with last week’s action against Microsoft as well as the ongoing effort to thwart the Northrop Grumman/Lockheed Martin merger the federal government has been leery of getting into the antitrust thicket. As seen in the above two cases, it’s a time-consuming, costly and not especially popular endeavor.
What’s more, there’s often little evidence that the merging of two companies no matter what size will result in reduced competition within an industry, the government’s basic antitrust criterion.
The more relevant question is should two companies merge? Is bigger in fact better?
The news conferences that often accompany really big deals show beaming executives laying out all the perceived benefits: improved efficiencies, reduced redundancies, enhanced synergies and so forth. Shareholders of the acquiring firm are happy because their stock has jumped in value to cover the offering price.
But the smiles are sometimes not long-lasting, especially when the payout is made in the stock of the acquiring company (the prevailing form of dealmaking these days).
Consider a study by two University of Iowa finance professors who sampled 947 publicly traded companies that were making deals over a 20-year period. They found that companies that paid for their purchases in stock did significantly worse in subsequent years than those that stuck to cold, hard cash. The explanation is sobering: Companies use their own stock to do deals because the valuations are high. At those prices, however, there is often no place to go but down.
And those promised efficiencies and synergies? There is scant evidence that they happen very often. In fact, a comprehensive study of conglomerate mergers conducted for the Brookings Institution found that the profitability of acquired companies, on average, declined.
So why merge? Some executives would argue that becoming bigger isn’t really a question of improved profits, but sheer survival. That can be seen in the recent flurry of bank mergers as well as in the efforts to acquire properties in related fields, such as when a movie studio buys a television network.
Of course, cynics point to another possible explanation for the big deals: Empire-building by the executives in charge. With the big becoming so big, it’s not hard to imagine that CEOs around the country are engaging in a kind of “me too-ism,” whether or not doing a deal is in the company’s best interest.
Should the government get involved in such matters? Probably not. And shareholders are seldom in a position to block a mega-deal. Which often leaves it up to the board to intelligently examine the long-term plusses and minuses and not just the quick payout. That’s a tall order, to be sure, but in these chaotic times, a most necessary one.