Mergers: Always failures?
"Big Mergers Have a Long History of Failure and Trouble." That's the title of a recent New York Times article (1/15/2004), which warns that big deals, like the J.P. Morgan Chase/Bank One merger, are often unsuccessful in spite of all the hoopla that surrounds them. Reporter Alex Berenson runs down the litany of disastrous mergers and acquisitions, including AOL-Time-Warner, Chrysler and Daimler Benz, and HP with Compaq.
Yes, there are many bad deals. Those in which the acquisition is based on executive vanity, greed, and deep misunderstanding are common enough. The urge to build an empire, whatever the cost, have done in companies from Vivendi to Parmalat, WorldCom to Tyco, and there's often enough something shady going on at the same time.
Berenson catalog the reasons why bank mergers in particularly often doing work well. "Information technology departments must spend enormous amounts of time and money worrying about integrating big computer systems with billions of pieces of customer data. Managers must spend big amounts of time and money ingratiating themselves with new bosses." One could add the enormous hit to morale and possible alienation of customers, who often have to live through seeing a new name on the sign in front their local bank eevry18 months.
The article contrasts the difference between merged companies and those that have had "organic: growth, without lost of acquisitions, namely Wal-Mart, Microsoft, and Southwest Airlines, "and many of the other truly successful growth companies and stocks of the next generation."
All this is true, but …
This site is no apologist for mergers, but while the disasters are many, there are successes. As even Berenson admits, Citigroup got to be number #1 through a relatively successful merger in 1996 between Citibank and Traveler's Group. Wachovia Bank's 2002 merger with First Union has done pretty well. In many other industries, recent M&As have done fine. Mergers by companies like Verizon and Comcast have been resounding successes, as was the merger of Mobil and Exxon.
And even the bad cases can end up with an even stronger company. J.P. Morgan ahs recovered well from its indigestion after swallowing Chase Manhattan. HP just recently re-asserted its position as the #1 computer company, one that it had lost to Dell Computer. And even Time-Warner is coming out of its AOL-induced slump.
On the other hand, we don't hear much about the hundreds of firms that decided to go it alone but just faded instead. K-Mart, Kodak, Gateway, and Sprint are all companies that have problems of various kinds, and all of them can be categorized as "organic." Indeed, the best chance for these companies is to be acquired.
As far as immediate stockholder return is true, big mergers are probably bad news. And Wall Street knows that well, since the acquirer's stock price often sinks right after the announcement, and may stay depressed for a while. But for many companies, becoming a marginal player or have too narrow a focus, is the biggest danger, and "inorganic" expansion may be the only way to attain that goal, even if it's not for the best in the short term. (None of this, of course, means that mergers are better for customers or employees.)
