Fantasy and Fiction in Merger La-La Land

By Harari, Oren | Management Review, September 1998 | Go to article overview

Fantasy and Fiction in Merger La-La Land


Harari, Oren, Management Review


You've heard the story about post-merger giants poised to dominate the world. Here's one about slow-footed beasts.

A friend of mine has a recurring nightmare. Two runners get set on the blocks in an Olympic heat. One is enormously overweight and arrogantly overconfident. The other is lean, fit and intensely focused on breaking a world record. My friend is in the stands, watching in horror as everyone (including those who are investing his money) bets on Mr. Corpulent to win.

I've been pondering this weighty dream as I try to digest the meaning of the most recent spasm of corporate mega-mergers. It's a big phenomenon. Nearly $700 billion in deals were announced in the first five months of 1998. The vox populi regarding all this merging, as seen in sensationalistic newspaper articles and TV soundbites, is that the bigger and the fatter the company, the more likely it is to dominate the planet - and do so unfairly.

With each new wave of deals, the public seems to wonder about the effectiveness of the antitrust laws. Gene Kimmelman, co-director of the Consumers Union office in Washington, D.C., is not alone in complaining that the Clinton administration "is underwhelming in its willingness to challenge efforts to monopolize markets."

The prevailing view is that the future will be controlled by two or three evil giants in every industry, and we poor riffraff will suffer for it. Suffer so much, in fact, that Rev. Jesse Jackson (no doubt an expert on capital markets) has concluded that many of the mega-mergers should be classified as human rights issues.

Enter Reality

Okay, are we ready to wake up and face reality? I'm here to announce that this scenario is all a fiction. Ironically, it's a fiction that those who actually do the deals desperately wish were true.

Let's take a more realistic view of the new mega-hybrids. More likely than not, they will be slow, clumsy, hyperbureacratic, debt-burdened, undervalued beasts who are bolted to the ground with excessive sunk costs, fragile patchwork infrastructure, passe products, outdated traditions, incompatible systems and conflicting cultures. As a result, their future is more likely to be a divestiture, breakup or liquidation than domination.

If you think I'm being hyperbolic, think again. The cover story of the April 28 issue of Barron's, the investor's bible, was entitled: "Why Mergers Don't Work." I could stop right there, but I think one statement from Barron's report says it all: "Most of the research indicates that between 60% and 80% of mergers are financial failures."

Indeed, New York University professor Mark Sirower, author of The Synergy Trap, concluded his research with the rather damning indictment that "acquiring firms destroy shareholder value. This is a plain fact." It's certainly a plain fact for Berkshire Hathaway's Warren Buffet, who has been consistent in his aversion to investing in companies that define their strategy in terms of acquisitions.

A Look at R.O.M.

For the past few years, I've argued that consolidating the balance sheets of two companies based on the typical justifications of cost savings, scale, synergy, global reach and so forth will pay off only if two assumptions can be made. These are such critical, obvious and yet overlooked assumptions that I'm calling them Harari's Rules for a Healthy R.O.M. (return on merger):

ASSUMPTION 1 Two large, disparate organizations can be integrated into a seamless whole in a cost-effective, timely manner.

This is a big assumption, for the research indicates that integration is, at best, often a long, bloody, uphill, earnings-draining battle. At worst, it's a slow strangulation. Witness the ATT-NCR fiasco over the past few years. AT&T was simply never able to absorb NCR into its business design and processes. This failure resulted in a $10 billion loss, a horrendous diversion of management attention and, ultimately, a costly divestiture. …

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