The winners and losers in a world mad on mergers
February 7, 1999
by Irwin Stelzer
This article also appeared in The Sunday Times (London) on February 7, 1999.
IF you think there will be any let-up in the megamergers wave that swept the globe last year, think again - 1999 is set to exceed last year's $2.4 trillion deals total. Last month a record $131.5 billion of deals were put on the table, against $88.7 billion in January 1998 and $14.9 billion in January 1990.
The financial community is agog and awash in fees. The competition authorities are agog and awash in work. American trustbusters are likely to be called upon to review 5,000 mergers this year while devoting resources to the lawsuit they hope will end Microsoft's efforts to monopolise the computer operating-systems market.
To the surprise of Wall Street dealmakers, the British are out-dealing the Americans. KPMG says British companies did deals worth $128 billion last year, $3 billion more than Americans, taking the lead for the first time since it began keeping records eight years ago. And that was before Vodafone bid $60 billion for AirTouch.
It is important to step back from the reports of these huge deals to see if there is a pattern and make some guesses at whether they will likely lead to increased efficiency or merely swell the size of the companies involved and the already-huge egos of their chief executives.
There are two main types of deals: defensive moves by companies in declining industries and aggressive deals in industries experiencing explosive growth - in sales, if not in profits. Oil, defence, cars and banks fall in the first category; telecommunications and the Internet in the second.
British Petroleum bought Amoco and Exxon absorbed Mobil because low oil prices and excess capacity are hammering profits. There will be fewer oil companies in the next century and Exxon and BP aim to be among those left standing after below-$10 oil sends rivals to the wall. And there will be fewer weapons producers as the end of the cold war shrinks markets and new technologies make existing factories obsolete. So we have Marconi swallowed by British Aerospace.
Chrysler and Daimler Benz and Ford and Volvo are responding to the possibility there are economies of scale to be had in the car industry and the need to sweat out excess capacity. The Birmingham consultancy PwC says there is 30% too much capacity in the world industry and predicts more consolidation.
The same is true in banking. Citicorp and Travelers and Société Générale and Paribas came together in an industry bloated with excess capacity and trying to hold customers who are increasingly self-sufficient in services they once bought from banks. Small customers find cash dispensers more convenient than branches; larger ones get capital from the markets, sidestepping the banks.
Telecoms and Internet deals are different. The telecoms-services market has become both highly competitive and global in scope as deregulation and new technologies drive costs down and the need for more, better and newer services drives demand up. Meanwhile Internet companies are combining in a desperate effort to convert sales growth into at least a modicum of profit and attain a size they think will ensure survival when the shake-out comes. The Broadview investment bank says the value of mergers in information technology, media and communications soared 87% in 1998. Paul Denoinger, the chairman, told the Financial Times deals valued at more than $1 billion rose from 4 in 1992 to 43 in 1998. Credit some of that rise to the sector's soaring share prices.
All of these deals create winners and losers. The clear winners are the executives who survive the bringing together of merged organisations. To most chief executives bigger is better - studies show rewards are influenced by a company's size, especially if the "psychic income" provided by private jets, ski chalets and photo opportunities with world leaders is counted in.
Investors in acquired companies also usually emerge with smiles as suitors take them out at big premiums. But investors in acquirers often find their shares diminished when the companies they own, but which their managers effectively control, go on buying binges.
That is because investors know bigger is not always better. Talented executives often leave, while the less talented remain, but turn from seeking profits to playing corporate politics. Computer systems collide rather than mesh. Foreign takeovers prove to be a prelude to unpleasant shocks. Brazil was the largest recipient of cross-border merger investment in the second half of 1998, says Robert Fleming. The buyers apparently did not factor in the risk that Brazil would devalue.
A full list of pitfalls would fill this page and more. To most lists Steve Wheeler, a Snell & Wilmer lawyer, would add potential environmental and state regulatory snares. Suffice it to say that two out of three deals fail to create value: only the selling investors walk away winners - and the chief executives, who know that bigger is indeed better, at least for them.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.