The Pressure to Buy
When companies are perceived as stagnant, there are a lot of things CEOs can do. They can pad the books, but that has disadvantages -- like incarceration. They can lay off workers or buy back shares, and a few have even been known to come up with innovative products that boosted sales. But one of the most popular strategies is to buy their way to growth.
The trouble with the last move, as Carly Fiorina recently discovered, is that it often backfires. Her dismissal from Hewlett-Packard Co. on Wednesday sent a message to other corporate bigwigs who are sitting on mountains of cash as they eye acquisitions: Big deals often lead to big problems, both personally and for the corporation.
Too bad nobody in corporate America is listening. In recent months, the let’s-make-a-deal mentality prompted Procter & Gamble to grab Gillette, SBC to adopt AT&T; and Sears, Roebuck & Co. to merge with Kmart. Those bigger-is-better deals have sparked -- or soon will -- another round of deals. One financial journalist compares the burgeoning corporate feeding frenzy to sharks that must keep moving or risk dying. Only time will tell who gets indigestion.
Fiorina understood the risks in 2002 when she championed a bitterly contested $19-billion merger with Compaq Computer Corp. Fiorina spent $100 million of shareholder money to fund a fierce proxy war with dissident director Walter Hewlett, whose father was a company co-founder. In the end, the first outsider to run the Silicon Valley company alienated longtime employees by abandoning the paternalistic “HP way.” Shareholders haven’t been all that enamored either, as HP’s shares sharply lagged behind a broad tech-stock index in the wake of the Compaq deal.
Professors at the nation’s business schools probably weren’t surprised by Fiorina’s dismissal. Tracking corporate mergers and acquisitions is a fuzzy science, but academics set the failure rate at somewhere between 33% and 85%. It’s too early to characterize Fiorina’s strategy or execution as flawed, but the market seems to think it was; the company’s share price rose two days in a row on word of her departure.
What’s the message for shareholders in general? Large industrial companies on the Standard & Poor’s 500 stock index finished 2004 with $600 billion in cash -- meaning shareholder money -- in their coffers. Last year, merger-and-acquisition activity rose by 29% to $700 billion. The tally for 2005 undoubtedly will soar higher.
All that cash might be better spent on dividends or higher wages. Consider the $56 billion that Microsoft distributed last year to blunt shareholder criticism of its stalled share price. Many of those folks probably blew the windfall on big-screen televisions or shares in open-source software companies. But at least they won’t need an accountant to figure out where it all went.
