The Timesizing® Wire
©2000  Phil Hyde, Timesizing Assocs, Box 622, Cambridge MA 02140 USA (617) 623-8080

---

Takeovers, alias Mergers&Acquisitions (M&As)
à la David Warsh and Michael Porter

        Harvard Business School professor and "comparative advantage" guru Michael Porter studied the 30-year record of big American corporate mergers way back in 1987, and published his findings in the June/87 Harvard Business Review. His conclusion?
        "The track record of corporate strategies has been dismal. I studied the diversification records of 33 large, prestigious U.S. companies over the 1950-1986 period and found most of them had divested far more acquisitions than they had kept. The corporate strategies of most companies have dissipated instead of created shareholder value."
        The latest greatest example of this is Mattel CEO Jill Barad's purchase of The Learning Company for $3.6B in May/99 and Mattel's sale of same for $430m sixteen months later.
        The 1987 Porter quote is from "When 2 + 2 = 3," a David Warsh article of June 14, 1987 in the Boston Globe, back when Dave was prudently avoiding politics and churning out excellent economics on a weekly basis, mostly in the form of economists' biographies. See his collection, "Economic Principals - Masters and Mavericks of Modern Economics" (New York: Free Press, 1993), pp. 313-16.

        Then why do they do it? Why in the world do CEO's keep ignoring the lessons of the past and merge-merge-merging? Here's Warsh's most powerful answer -
        "Time and again, corporate insiders have told of the terrific sense of power that develops in the vortex of the high-priced deal. With the fever fanned by investment bankers, consultants, lawyers and press agents, it is no wonder that bouts of takeoveritis are as common as flu..\.. Porter suspects that most deals have been done by bosses...who 'confused company size with shareholder value'." (p. 314)
        Guess this is what we've come to know as "testosterone poisoning."

        And here are Warsh's other answers from waaay back in 1987 -

• "The classic rationale for diversification is to 'get more legs on the stool,' to smooth out the cyclicality of one particular business by complementing its profits with those of another company in a different cycle."
  So why don't they just do what the gas company does and invite customers to do payment-averaging?
• "Another often-heard management ambition is to search out inter-relationships between businesses and exploit them, the famous '2 + 2 = 5' or 'synergy' of the 1960s."
  But a takeover destroys the chances of synergy because despite the rhetoric, the independence of one of the companies is gone. You synergize with a joint venture, not a takeover.
• "Another justification is the supposedly superior ability of professional managers to spot bargains."
  Ha, there's nobody who can spot bargains like small businesspeople. They have don't have any choice, and "necessity is the mother of invention."
• And then there's "the hostile takeover as a form of erotic art \whose\ foremost exemplars \were\ William Agee and Mary Cunningham."
  We suggest they substitute computer games and spare the innocent bystanders.

"Managers should let shareholders do the diversifying, Porter says." (Or as the old saw has it, "Shoemaker, keep to thy last." - "last" here meaning the foot-shaped form that shoemakers of old used to shape the leather.)

For a more recent indictment of mergers, we turn to The Economist magazine of London, whose cover picture on July 22nd, 2000 showed a drawing of a fanciful bird (owl?) with the head and shoulders of a fish, meant to recall "Neither fish nor fowl," the whole supertended by the headline, How mergers go wrong, and referring to the editorial of the same title on page 19 -

1. "One report by KPMG, a consultancy, concluded that over half of them had destroyed shareholder value, [fewer than one in six increased it,] and a further third had made no discernible difference."
   And since mergers involve considerable trouble and expense, "no discernible difference" has to count as failure, giving mergers a 5/6 (83%!) failure rate."

2. "...[There's] the Titanic league of merger disasters on the scale, say, of AT&T's 1991 purchase of NCR, the second-largest acquisition in the computer industry, which was reversed after years of immense losses."
   We might now add to that Jill Barad's Big Booboo when as CEO of Mattel in May/99 she bought The Learning Company for $3.6B only to depart under a cloud and see Mattel sell it on 9/30/2000 for $430m, proving, alas, that women can be just as stupid and business-fad-driven as men. And you don't wanna recall the huge and disastrous RR merger between the Union Pacific and Southern Pacific in 1996 which created months of havoc for shippers.

3. "When a company merges to escape a threat, it often [embraces unnoticed] problems [along with] the marriage. ...In the starry moments of courtship, [it] may find it easier to see the opportunities than the challenges. [Vereinsbank in Bavaria] is an egregious example: it took more than two years for [it] to discover the full horror of [the] balance sheet of [its former Bavarian rival and new partner, Hypobank]."
   As the old saying goes, "Love is blind" - especially when the alternative is forced marriage to Big Ugly (Vereinsbank was feeling threatened with takeover by Deutsche Bank.)

4. "As every employee knows, mergers tend to mean job losses. [So] no sooner is the announcement out than the most marketable and valuable members of staff send out their resumes. [If they don't] learn quickly that the deal will give them opportunities rather than pay-offs, they will be gone, often taking a big chunk of shareholder value with them."

5. "As in every walk of business, luck and the economic background play a big part. Merging in a [down]swing is [harder] to do, as [fall]ing share prices [forbid] bidders to finance deals with their own paper, and it is also [harder] to reap rewards when economies are [shrink]ing."
   The Economist is such a sycophantic little cheerleader, it is sometimes necessary to reverse-polarity on their sentences to keep them answering the title question. The question was not how the one-sixth of mergers that go right manage to do it but "How [5/6 of] mergers go wrong."

6. "No company can have two bosses for long. So one boss must accept a less important role with good grace. After many months of dithering, Citibank's John Reed eventually made way for Sandy Weill of Travelers. [They should have taken a lesson from] the success of the union of Time Warner and Turner [which gave] the mercurial Ted Turner..\..a financial interest in [working] with the stolid Mr Levin \and\ making the merger work."

7. "Without leadership from its top manager, a company that is being bought can all too often feel like a defeated army in an occupied land, and will wage guerilla warfare against the deal."
   We guess that despite the 83% ("5/6") failure rate of mergers, we can all at least reflect with relief that 500 years ago all this testosterone was being expressed by actual armies and occupations, with huge actual loss of life instead of "just" loss of job.

Questions, comments, feedback? Phone 617-623-8080 (Boston) or email us.