Mergers: They’re What’s for Dinner

For the business press, the more mergers and acquisitions, the better. Too bad most of them don't work out.

Is it just The Audit, or does anyone else feel that business stories about mergers and acquisitions sound like they were written as though readers should break out champagne and throw their hats in the air?

The long-awaited unleashing [Audit comment: grrrrrowrrr!] of bank mergers in Europe is at hand, promising to reshape the industry as the continent’s financial giants yield to the lure of size and global scale. [Boo-yah!][1]

Never mind the details, what’s of interest here is language.

For AstraZeneca, based in London, the acquisition would help bolster its product pipeline after some recent setbacks and would supplement its portfolio, now consisting of pills, with biologic drugs—protein-based therapies that are made in cultures of living cells.[2]

Bolstering is good, especially after setbacks.


LaSalle, which BofA proposes to buy from ABN Amro for $21bn, would immediately push BofA to the top of the lucrative Chicago market, one of the few US cities where it has little penetration.

The Audit feels that it’s good to be on top, generally speaking, especially in locations where one has little penetration.

BofA would add 17,000 commercial and 1.4m retail clients. It would gain a foothold in Michigan and, at a time when earnings growth is slowing, executives say the deal would immediately add to profits.[3]

Michigan? Wow!

Listen, mergers are undeniably news, and what’s more, they’re one of the most fun things in business to cover. There is a wow factor. These are big capital-allocation decisions affecting thousands of jobs, billions of investor dollars and, in the aggregate, the outcome of the competitiveness struggle of companies and nations. And while M&A is routine on Wall Street, for most companies, it is a one-time roll of the dice. An acquisition taken is a dozen alternatives foregone. They’re also benchmarks—important pricing moments that help determine values and in fact, create realities. What was unthinkable the day before—think AOL-Time Warner—is now happening.

And for sheer glamour, you cannot beat a cross-border contested deal, like the one going on now for control of ABN Amro. After Barclays agreed to buy the Dutch banking giant for $88 billion in stock (never mind about how that works; it’s not as good as cash), a consortium led by Royal Bank of Scotland offered an unwelcome (to ABN’s managers who fear the new bidders will break up their company) bid of $99 billion, about 70 percent in cash. And how about this oh-so-British understatement from Sir Fred Goodwin, RBS’s chief executive, quoted in The Financial Times: “Most people would think we’re good for it,” he says. “We’ve got the cash.”

So, The Audit has nothing against deals. The Audit is not—as The Audit’s many foes, enemies of truth, may or may not believe – a deal-killer.

But reading some—maybe most—stories about blockbuster deals, the reader could understandably come away with the impression that something good just happened, particularly for the acquiring company.

Um, that’s not the case.

In fact, in probably two out of three cases, shareholders of the acquiring company should wear black armbands.

“Acquiring firms destroy shareholder value,” writes Mark L. Sirower in The Synergy Trap: How Companies Lose the Acquisition Game. “This is a plain fact.”

Sirower, managing director of PricewaterhouseCoopers’s M&A strategy practice and a visiting professor at New York University’s Stern business school, doesn’t mean all acquiring firms are shooting themselves in the foot, just most of them. And if you think The Audit has found some obscure prophet to make a highly contentious point—a business blog’s cry for attention—you are wrong. Apart from all of Wall Street, and all the consultants who depend on it, you will find few academics who would contest this point, and it is common wisdom among M&A reporters. If this post triggers heated debate to the contrary, that these deals are actually wonderful, good. Let’s hear it.

There is no consensus on how many mergers fail, just that most do. Sirower says past estimates of failure rates of up to 80 percent are overstated. He pegs it at 65 percent. I have no idea.

Sirower has some funny examples that echo in memory.

Anheuser Busch bought the maker of Eagle snacks in 1982. Beer and pretzels, brilliant! As Sirower dryly notes, “They all use yeast.” Not part of the planning was the inevitable response by Frito-Lay, which cut prices, introduced new products, and crushed Eagle and its chips. After seventeen years of losses, the Eagle brand was put to rest, with four of its plants sold to … guess.

Does anyone remember that Sears Roebuck & Co. once owned what was Dean Witter Reynolds and Coldwell Banker, on the theory that shoppers for underwear and power tools would want to stop off at a Sears Financial Center to trade a few stocks and then maybe pick up a, um, house? Uh, no.

Quaker Oats Co. and Snapple (1994) seems logical, and yet it was a famous disaster, which, interestingly, as Sirower notes, Quaker Oats investers, as is frequently the case, knew from day one, knocking 10 percent off Quaker’s share price.

I don’t mean to imply that there is some kind of conspiracy of silence in the business press. No one is keeping deal failures a secret. The fact that most fail is often written, but just, I would argue, never internalized.

And in fairness, it should be noted, first, that deals—despite the layoffs and dislocation typically associated with them—apparently do result in a net positive for society, albeit a marginal one, when you consider the price received by the seller and efficiencies won. But buyers’ boards of directors are not supposed to help the world by blowing their shareholders’ money, and I don’t think reporters are thinking about the good of the earth when they applaud.

And I don’t want to overstate the case. Quality business coverage often includes caveats, questions, and even sometimes outright skepticism. “The markets have not always taken kindly to BofA’s strategic moves,” writes The Financial Times in a column accompanying LaSalle story quoted above.

And I should finally note that much of the overheated language comes under insane deadline pressure, under which even the fastest writer would say almost anything as long as it’s not wrong.

But generally speaking, I’m right. The business press loves the deal.

Why deals keep happening so often is the subject of another post, but let me offer three big reasons and one lesser one. One is the “agency problem,” the oft-noted rewards that accrue to top corporate decision-makers who benefit in myriad ways, not least being money and prestige, by controlling a bigger company. And there is the “deal-infrastructure” issue, namely, Wall Street investment banks, which make a living putting together companies and taking them apart, and can make any stupid plan sound brilliant.

A third reason for all the deals is that a significant number of them do work.

But a fourth, lesser reason, for the unproductive deal churn, is what I would call the “business-press infrastructure” that loves deals for their own sake. A scoop on a major deal is red meat to a business publication, and serious currency for a business reporter. These scoops make or break careers. For M&A reporters, the more deals the better. Don’t let anyone tell you different. A fallow deal period can leave even the most highly touted M&A reporter—even though it’s not his/her fault—with the faint but unmistakable stink of failure.

And if you ask whether there might a conflict of interest, whether reporters must be nice to companies and banks that put these deals together, the answer is yes, albeit, I think, a manageable conflict and only different in degree from the standard beat reporter-company problem.

All this is to say nothing of the public-relations infrastructure that manages major deal announcements. Most Audit readers have never heard of Sard Verbinnen, Joele Frank, Wilkinson, Brimmer, Katcher, and Brunswick Group, but I guarantee you every M&A reporter has. Ever read the term: “people familiar with the situation”?

So, next time you read about the next blockbuster, just remember a few headlines from the past:

The New Media Colossus —- AOL-Time Warner Megamerger Creates Behemoth That Could Dominate Web, Other Media
The Wall Street Journal, December 15, 2000

Tyco’s Titan: How Dennis Kozlowski is creating a lean, profitable giant
Barron’s, April 12, 1999.

Or check out this blowhard.

International Paper’s Bid for Champion
Could Spark Battle With Finland’s UPM


April 25, 2000

International Paper Co. offered $6.2 billion in cash and stock, or $64 a share, for its smaller longtime rival, Champion International Corp., muscling [ruff! ruff!] in on Champion’s agreement to be bought by Finland’s UPM-Kymmene Corp…

International Paper’s audacious [!] move adds more fuel to the merger fire [Burn, baby!] that has consumed the global paper industry this year. Behind the moves: A tighter rein on supplies would help the industry have more control over the wildly fluctuated prices that have traditionally haunted [spooky!] the industry.

Did it work out? I have no idea.

1. “Amid European Fray, Biggest Bank Deal Ever,” The Wall Street Journal, April 23, 2007
2. “AstraZeneca Acquires a Biotech Company,” The New York Times, April 24, 2007
3. “Deal that BofA’s chief could not refuse,” The Financial Times, April 24, 2007.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.