First a merger, then a demerger
The constant boasting about synergy and enhanced market power that accompany any merger or acquisition is just talk. There are other reasons for such deals, including the financial advantage of the principals, the megalomania of a CEO, the fact that M&A is easier than the humdrum task of actually improving a company's performance, or sometimes just creating the impression that something is being done.
Nowhere is it shown better than when accumulation of assets is thrown into reverse. Citigroup, for example, is currently in the process of disassembling what had taken up so much money and energy over the past few decades.
An even purer example is the announced split up of auto parts company ArvinMeritor. That company was created by the 2008 merger of Arvin Industries and Meritor Automotive. Arvin was a manufacturer of automotive exhaust systems; ride control products; air, oil and fuel filters; and gas charged lift supports. Meritor, which had been part of conglomerate Rockwell International, made truck axles, brakes and seat frames.
Let's listen to Arvin CEO Bill Hunt at the time of the merger, as quoted in a BusinessWire article on 4/5/2000 (Arvin and Meritor to Merge Creating a $7.5 Billion Leading Global Automotive Supplier):
"We share a common vision and culture, and there are many similarities in the way we have individually driven our businesses in the pursuit of continuous improvement and greater shareholder value....We will achieve our objectives through accelerated top-line growth derived from product innovation, a focus on customer service, and the quick realization of sales and cost-reduction synergies."
Hard times have hit the auto parts industry, especially those that are tied to America's Big Three. The company as a whole has not be profitable for years, and the gross income is down to $6.4 billion.
So it is eight years later, and the two companies are about to be split. The automotive parts will be spun into a company called Arvin Innovation. The specifically truck-related part of the business will remain. According the company and analysts, the operations will be worth more split up than merged.
So which is it? Do mergers increase value or do demergers create value? The answer, delivered with confidence, is "Yes." Whatever current management can convince investors as being plausible at the moment is the right answer. In reality, no one knows.
"If I look at eight years ago, it was a good idea to bring them together," Chip McClure, ArvinMeritor's chairman, chief executive and president, told The Associated Press. "What existed back in 2000 is significantly different in 2008 for ArvinMeritor." (AP story, 5/6/08)
In other words, whatever I say is right when I say it.
