Is Bigger Really Better?

By Cerami, Charles | Insight on the News, March 6, 2000 | Go to article overview

Is Bigger Really Better?


Cerami, Charles, Insight on the News


As big corporations continue the trend of massive mergers, they may be imperiling the U.S. economy.

The billowing size of each new merger or takeover gives the impression that corporate heads are anxious to pay as much as possible to acquire a desirable partner. The chief players often have managed to gain hundreds of millions of dollars in bonuses and options for themselves as part of the deal, and the main propellant of the rocketing deals has been a seller's market of such force that buyers have been panicked into paying almost any price, lest some competitor win the prize. Meanwhile, stockholders usually have egged on their companies by bidding their own stocks higher whenever a deal was in the wind.

One week it was Alcoa, the world's largest aluminum company, offering to pay $65 a share for the stock of Reynolds Metals Co., a proposal that was 17 percent higher than its price on the Big Board. Reynolds held out for more and won a deal for nearly $71 per share -- several billion dollars above what the market previously declared it to be worth. Even at that, Reynolds demanded a 30-day period to accept any better offer that might come along.

Within days the headlines were taken over by MCI and Sprint, with new record numbers. They were eclipsed by a deal in which Warner-Lambert was to merge with American Home Products to become "the greatest of pharmaceutical companies," until Pfizer broke that up by entering a much larger bid for Warner-Lambert. In every such case, stock prices that previously had been established by investors from around the world through the normal workings of the markets were exceeded by many billions of dollars and on the quick decisions of a few corporate officers.

At one point it appeared that there had been a slowdown in these activities, leading some U.S. financial houses to shift their merger specialists to the European market. There were notable management changes at Morgan Stanley Dean Witter and the Goldman Sachs Group which, as the New York Times put it, meant that "Wall Street power is following the money across the Atlantic" in search of the big fees involved. But the tempo soon picked up again on both sides of the ocean, and the most trumpeted deal of all, AOL/Time Warner, set yet another dollar-denominated record. (For perspective, it should be noted that this is not necessarily in the same category of growth for growth's sake. Each of the two parties was trying to fill a gap that threatened its future, which could out-weigh the price it had to pay.)

Some unsettling effects of the craze for instant growth already have shown up. Deals that were greeted joyously by stockholders and financial pages are being revealed as the cause of down-turns in earnings and growth projections. A scan of corporate reports makes it appear that as many as four out of five such deals are at least partial disappointments, while two out of five are outright failures. Yet the potential effects on corporate balance sheets -- overstating true worth and, one day, seriously undermining stock markets -- have received little attention.

Lockheed Aircraft Corp. and Martin Marietta, after the two merged, grew and grew -- until the resulting control problems led to lost contracts and a 35 percent drop in Lockheed Martin's stock price. The Disney-ABC giant also saw its value tumble by a similar amount. A Southern retail group called Proffitt's, with long experience in moderately priced goods, acquired the more elegant Saks Fifth Avenue chain and soon its chairman said, "It's clear we're not going to meet our very lofty expectations," shaking Wall Street's confidence in the whole operation. Harcount General spun off its Neiman Marcus stores after a huge loss. Almost every day's financial pages bring two or three such reports of deep disappointment.

Time and again, the overpayers end up getting nothing at all for their money. It is easy to say that business leaders -- caught up in a passion for personal aggrandizement and huge take-home pay -- should see and correct this. …

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