Merger motives
A solid article by Gretchen Morgenson in a recent New York Times Magazine ("What Are Mergers Good For/", 6/5/05) explores the motivations for mergers and acquisitions that we have frequently discussed on this site. She rightly sees that executive compensation rather than long-term benefit to the company or (heaven forfend) employees or consumers is the primary motivator if many, if not most, high-profile mergers and acquisitions.
The author notes:
There's a disturbing trend among some of the most aggressive corporate acquirers to use deals to mask deteriorating financial results at their companies and reap outsize executive pay. The complexity of folding companies into one another makes it more difficult, whether by accident or design, for investors to fathom what's really going on.
The artificial growth in gross revenues that buying a new division or subsidiary brings can disguise disappointing results in net income of the core busienss. The day of reckoning can be postponed, and the assumption is that somehow new economies of scale based on a higher gross inflow will make the company all the better off in the end. Maybe, maybe not.
As Morgenson points out, some of the biggest fraud cases in recent years have come in companies that are rampant acquirers (Tyco, WorldCom, and, as we have often argued, the big payoff is always to the corporate executives and the Wall Street bankers that abet them in their mergers.
"The actual numbers associated with some of the bigger deals can be staggering. James Kilts, the chief executive of Gillette Company, stand to make $165 million from merging that venerable Boston company with Cincinnati-based Procter & Gamble," And, while he makes out like bandit, many current Gillette employees will lose their jobs. Similarly, the sellout of Toys 'R' Us to $170 million for its top execs; MONY's executives, who sold their company to AXA, "earned" $83 million for the deal.
For the acquiring company's CEO, the principal is that the bigger the company, the bigger the CEO's pay. In fact, the article points out that CEO's get compensated at a higher rate for the "growth" realized by acquisitions than any organic growth arrived at by better sales of existing products.
One point I take issue with in the article. Morgenson points out that merger cycles are cyclical, and that, like the turn-of-the-20th century merger mania, this too may pass. Of course, the cycle may play out its course, but don't think so. The oligopoly game, as currently practiced, allows for a far more sustained domination of markets. If mergers and acquisitions do peter out, it will be because there's little left to acquire in various sectors and the oligopoly has reached a certain stasis.
