As we've been saying…
It's nice to read Newsweek's irreverent business columnist, Allan Sloan, back up what we've been saying for a long time ("Sweet Deals: Bulk Up, Then Break Up", 1/23/06).
As he puts it: "This is a pop quiz: Is it better for companies to grow bigger and more diversified, or for them to get lean and mean and focused?" If you are an investor, it's not clear what the answer is, an acquisition may be a disaster or a triumph, and we have plenty of examples of both. But if you are a Wall Street investment banker (or a company executive getting a golden parachute), the answer is that things are good either way.
Stock analysts puzzle over whether any of the deals announced (such as Tyco's or Viacom's split-ups) will be positive or negative for the bottom line, Sloan argues that there is no doubt who will profit. The investment banks will get tens of millions for helping those companies break up. "It also turns out that investment bankers have made at least a quarter-billion dollars of advisory fees from Tyco and Viacom over the past decade by helping them buy things." And, as Sloan notes, it's almost certain that the split-off companies will soon start acquiring again, with even more fees for the bankers.
Sloan notes that these fees are hidden, so that investors never get to see them. So it's impossible to check on whether the money was well spent. And of course, if the process is simply one of cyclically getting big and getting small, the fees eat into investor returns and business productivity in a serious way. According to Sloan, "Wall Street's real business is making deals, not looking out for its clients."
