Bigger is better. It’s an argument underpinned many mergers that happened over the last decade. But it’s clear that not all of the corporate marriages were for the better. A number of mergers completed in the 1990s and 2000s are slowly coming apart as companies groan under the stress of the recession.
Bull markets throughout much of the 1990s and 2000s fueled a wave of mergers in many industries. Auto manufacturers went on buying sprees fueled by profits from SUVs and trucks. Two Baby Bell companies—AT&T and Verizon—spent much of the last two decades undoing the government mandated 1984 split of the original AT&T. In the pharmaceutical sector, Pfizer alone bought three companies—Warner-Lambert in 1999, Pharmacia in 2002, and Wyeth in 2009. Tech heavyweight HP purchased Compaq in 2001 to gain a foothold in the personal computer market. And let’s not forget the biggest of them all, the AOL-Time Warner merger in 2000.
“Mergers are sort of an ‘easy’ strategy,” said David Besanko, a professor of management and strategy. “While not all mergers are bad for shareholders, during bull markets and periods when the merger enforcement environment is lenient, rather than doing the hard work of figuring out profitable organic growth opportunities based on a diagnosis of economic fundamentals, market opportunities, and the firm’s own distinctive advantages or disadvantages, senior managers may be tempted to pursue growth through merger.”
Merger fever, he said, “ends when the bull market ends and/or when there are spectacular failures that illustrate either the limitations of profitable growth through M&A and/or the failures of corporate governance.”
Analysts can get swept up in the excitement of a merger wave, too. For much of the 1990s and 2000s, many analysts were positive on mergers. “Seeing lots of mergers, analysts may jump on the bandwagon figuring that what firms are doing must be the right thing to do,” Besanko said. “For a while, this dynamic can be self reinforcing.”
The recession may be responsible for exposing the weaknesses of some corporate marriages, and in turn, put the damper on analysts’ rosy opinions. Of the mergers listed above, not all of these have panned out. Presently, HP is contemplating selling its PC business. Time Warner spun off AOL in 2009. Ford unloaded the brands in its Permier Automotive Group—Jaguar, Land Rover, Aston Martin, and Volvo—starting in 2006, undoing two decades of acquisitions. DaimlerChrysler, formed of a 1998 merger between Daimler-Benz and Chrysler, split in 2007 after it was clear that Chrysler was sinking Daimler’s ship.
Even old mergers can be tested in downturns. McGraw-Hill, for example, will be splitting into two companies, one which will oversee its education products and the other its financial and energy market information products. The latter will house Standard and Poor’s, which the publisher has owned since 1966.
AT&T’s proposed buyout of T-Mobile USA shows there’s still some appetite among companies for big buys—though there may not be much support among regulators for that specific deal—as does Google’s purchase of Motorola Mobility. These new deals may pan out, or they may not. One thing all companies should consider, Besanko said, is that effective mergers “should represent a sensible adaptation to economic conditions and it should enable the merging firms to do things together that they could not do separately.”
Photo by wiserbailey.