From Merger Mania . . .

Dec. 21, 2004
. . . to spinoff schizophrenia.

It was a tricky situation. I dreamed I had gotten off on the wrong foot, and, to make matters worse, I was a centipede. I was espousing my management style to an M.B.A. class, making the point that in todays technology-driven manufacturing environment, "tried" and "true" may not be reliable indicators of future success. My subject was "Merger Mania." I was making the point that thinking "outside the box" may put wrinkles on your face, but it can often keep you in the race against your competition. Its a rat race out there, and your competitors are bringing in faster rats. The merger mania driving business today is being fueled by companies whose top managements have, in many instances, failed to define clearly what their companys business is -- and what it isnt. Merger mania is being propelled by top-management self-gratification rather than by self-discipline, and by CEOs more interested in building monuments to themselves than in strengthening the foundations of their core businesses. I predict that todays merger mania will be tomorrows spinoff schizophrenia. Its as astounding and confusing as the chief executive who asked his operating management to write a business plan for plumbing the potential profits in Mississippi without telling them whether he meant the state or the river. Of course, acquisitions can be an effective technique for growing a company. But, in reality, making acquisitions is not a true measure of managements ability to "manage" its core business. It is merely an indication of one companys ability to negotiate a deal and to pay for another companys sales. It says nothing about the acquiring companys ability to integrate the merged partner into its corporate culture, its ability to exploit synergies, to produce a respectable return on the huge investment, or, for that matter, to grow the business once the merger is complete. Mergers are usually one of three types: horizontal, vertical, or conglomerate. Of the three, horizontal mergers have been the most successful over time, because they are lateral extensions of a core business. Conglomerate mergers, on the other hand, have been the least successful because of the disparate nature of the companies comprising the merger. They are functionally and economically different and, therefore, difficult to manage efficiently. The major weakness in most mergers, however, is not that inexperienced managers enter unfamiliar fields, although that is a weakness. The major problem is that the obscene prices paid for many mergers put inordinate pressure on the management responsible for producing a satisfactory return on the inflated cost of the investment -- that onerous goodwill factor. The human element in mergers cannot and should not be underestimated. Dreams of building ones personal empire or creating the impression of growth to satisfy aggressive stockholders have created more flawed mergers than managements are willing to admit. In a moment of candor, one CEO I know offered this explanation for his sortie into merger land: "When I became chief executive, I wanted to establish my credentials by making an acquisition. I wanted to show my competitors that I could woo and win as well as they. Its like going out on your first date. All you need to establish your reputation is a girl, any girl." Who said candor is kinder? It has been suggested by some acquisition cognoscenti that larger firms have tended to achieve growth by merger even at the expense of their shareholders. In other words, growth for growths sake rather than growth for the shareholders stake. Observers estimate that as many as 50% of the companies that made acquisitions have not achieved successful returns as a result of those acquisitions. The only people guaranteed to make money in the weird world of acquisitions and mergers are the brokers, the investment bankers, the attorneys, and the accountants. And, of course, the managers who bail out in their golden parachutes. One would have to be comatose not to have noticed the recent avalanche of IPOs, most of which are spinoffs of companies acquired during periods of merger mania in the recent past. This proves my point that todays merger mania is tomorrows spinoff schizophrenia. If Ambrose Bierce were alive today, he would add this definition to his Devils Dictionary: Merger -- A business-world device used by self-serving chief executives to make investment bankers and attorneys rich. Sal F. Marino is chairman emeritus of Penton Publishing Inc. His e-mail address is [email protected].

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