When household-name companies like Dell, Heinz and American Airlines put up “for sale” signs, stock market investors get excited.
They figure a flurry of high-profile buying and selling will drive up prices even for companies not involved in the deals. Shares in Staples, for example, jumped 13 percent in February when its two retail rivals, Office Depot and OfficeMax, decided to merge.
Too often, however, today’s high-priced deal becomes tomorrow’s costly bust. Executives can talk about synergies all they want, but mergers destroy value at least as often as they create it.
Remember AOL and Time Warner? They got married in 2000, at the height of dot-com mania, only to divorce a decade later. The deal was valued at a record $186 billion, but at least $100 billion of that has gone up in smoke.
Why, given such a poor track record, do companies continue to feel the urge to merge? The answer might lie partly in management incentives — running a bigger company usually means a bigger salary — and partly in a bias toward optimism.
Some deals do succeed, after all. Anheuser-Busch InBev has seen its stock price rise 153 percent since the 2008 merger that broke many St. Louis beer drinkers’ hearts.
Other managers see such returns and look for ways to match them.
“Some companies seem to have expertise at integrating acquisitions, and on average they do well, but others do poorly,” says Armando Gomes, associate professor of finance at Washington University’s Olin School of Business.
The bad acquisitions sow the seeds of future deals, as poorly run companies need to be broken up or sold. “Companies that are systematically bad acquirers will eventually make good targets,” Gomes says.
Despite the flurry of brand-name announcements, today’s merger-and-acquisition scene remains fairly tame. Dealmaking in January and February is 8 percent ahead of last year’s pace, according to Bloomberg, but last year’s $2.2 trillion in global deals was far below the 2007 total of $4.1 trillion.
Norm Conley, chief investment officer at JAG Advisors in Ladue, expects merger activity to pick up.
“We have very low interest rates, and top-line growth is arguably a little harder to come by,” he says. “Therefore, acquiring a business and streamlining the cost structure has to be the most feasible way for a lot of businesses to grow earnings.”
Cheap financing does make it easier to do a deal, but Gomes says mergers are usually driven by what he calls shocks. High jet fuel prices led to a wave of airline mergers, and the spread of e-commerce has driven several retail combinations, including Office Depot and OfficeMax.
That’s why it’s not always easy to assess an acquisition’s success or failure. Perhaps, absent a deal, some troubled acquirers might have succumbed to the shocks hitting their industries. Office Depot doesn’t want to end up like Borders, the failed bookstore chain.
That doesn’t excuse catastrophic mismatches like AOL Time Warner or DaimlerChrysler, but it does explain why managers always manage to be optimistic about their next deal.
Do executives engage in empire building, sometimes at the expense of both shareholders and consumers? Clearly, history tells us the answer is yes. But Gomes believes dealmaking is, on balance, a force for good. “Mergers are really a very important force in bringing more efficiency into the economy,” he says.
Source: MCT Information Services