Some Play the Merger Game Just for Action

The chief executive of the big West Coast company droned on about the changes needed to keep the place in tune with the times. It was right from the MBA program textbooks, jargon and all.

He “dimensioned the problem” and talked about all the “outliers” (lines of business not returning a decent profit) and “driving the concept down through the organization.” By the time he was through, several in attendance wondered what he was really saying, if anything. An outside director of the company, recalling other such sessions, later conceded to a friend that privately he wondered, too. Moreover, he mused aloud, “I wonder how much of that he understands.”

In their quest for ways to boost the value of the corporation in a period of heightened competition, many companies are embarking on discussions like that, some with a clearer set of goals and a more definite plan of action than the CEO cited above. It’s all part of establishing a corporate strategy, a task fraught with peril.

Booz, Allen & Hamilton, a management consulting firm, has a presentation it makes on corporate diversification strategy and its role in creating more value for shareholders. Read some of the less serious parts of it and cringe.

To start with, the firm points out that many of the major acquirers of other companies have also been big divesters. One company, for instance, has made more than 40 acquisitions and sold more than 20 of its company units in the last decade. Another has taken on 25 and sold 19. On the surface, at least, it looks like a lot of churning of company assets. The question, of course, is what good comes of it.

To help answer the question, Booz, Allen surveyed 100 CEOs on their perception of how their acquisitions had turned out. Only 37% called the efforts successful or somewhat successful.

‘Wilted in Competition

Under reasons for disappointment comes a comment from investor Warren Buffett, quoted in Fortune magazine as saying, “Management intellect wilted in competition with managerial adrenaline.” Then there are these unattributed comments on the synergy or extra value that’s supposed to result from some mergers: “One of the more exaggerated concepts.” “When somebody says ‘synergy,’ feel for your wallet.”

If that’s not enough to give the consummate acquirer pause, try this comment from the CEO of a company with 60 acquisitions and divestitures to his credit in the last 8 years:

“In almost every instance, in the good acquisitions we’ve made, we could have paid significantly more and they still would have been good. And in the bad acquisitions, we could have paid significantly less and they still would have been bad.”

The fact is there’s a lot of energy used up in this economy by those more interested in finding something else to run rather than running what they have. Most of the long-term studies of big mergers and acquisitions find relatively little additional value created.

Why does this happen? Larry L. Lowry, a Booz, Allen vice president, argues that a lot of it reflects a basic drive to acquire simply to make the company bigger.

“Sometimes the logic is not bad,” like steel companies diversifying out of a declining industry, “but often it’s the second part of the decision, ‘What do we go into?,’ that gives the problems,” he says.

Then there’s the matter of not doing enough homework, he points out. Like the case of the two airlines that thought their routes complemented each other but failed to see a lack of compatibility in equipment and organization.

The point of it all, of course, is to go into something where greater value can be created. Like when a big hospital supply firm is able to add products to feed through its strong distribution system. Too often, the acquirer knows too little about the acquired’s industry and just winds up disturbing the people running the newly appended operation who do.

Robert D. Paulson, Los Angeles managing director of the consulting firm McKinsey & Co., cites cases where companies with a nice old-line business making lots of money try diversifying to make more. “Years later, they look back after all that effort and the profits are still coming largely from that original business.”

Ah, the futility of it all.