Are Companies Too Eager To Do Big Mergers?
from the big-egos-big-mergers dept
With Microsoft and Yahoo! back at the negotiating table, Megan McArdle suggests that corporate CEOs are too trigger-happy when it comes to big mergers. She says there are a few situations where mergers really make sense, including when there are significant economies of scale or cost savings. A big part of the original rationale for the Microsoft-Yahoo! merger was that it would give them the scale to compete effectively with Google in the search advertising market. But against these speculative advantages, it has to be remembered that Microsoft would have have had to pay a hefty premium on a firm's market value, cover the costs of the merger process, worry about corporate culture clashes, and absorb the reduced productivity as employees of both companies were focusing on the details of integration rather than developing new products. The deal would have had to produce some amazing benefits to offset those costs.Indeed, this kind of basic math suggests that big mergers should be pretty rare. But in practice, they seem to get proposed pretty often. In a lot of cases merger proposals seem to be driven by empire building and excessive optimism on the part of the acquiring CEO. CEOs tend to have high opinions of themselves and their managerial skills, and they like the idea of running a larger, more prominent company. And with deals of this size, it's almost always possible to tell a plausible story of how things will turn out well. The AOL Time Warner merger is the classic example of this, it was heralded as a strategic master-stroke, but it created a lot of problems and the promised synergies never materialized. Megan suggests that Microsoft's new strategy of pursuing a strategic partnership rather than an outright acquisition makes more sense. They can probably get most of what they could have gotten from a merger without all the baggage that comes with a full-blown acquisition.
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Filed Under: big companies, deals, mergers
Companies: microsoft, yahoo
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I don't disagree except....
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Do execs get bonuses for mergers?
And the company being taken over would in some cases support the merger because the senior execs would have share options built up that are now suddenly worth a lot more due to an increase in the share prices.
The board members of a company being taken over either have larges numbers of shares or a representatives of a person/entity who has a large number of shares that are now much more valuable due to the usual premium offered in takeovers, therefore of course they'd be inclined to sell for a quick gain.
So it's usually the possibility of a quick gain for certain few individuals, the individuals who usually have huge influence on accepting/rejecting/proposing mergers (i.e. senior execs, board members, major shareholders) that drive takeovers.
This theory probably makes me a cynic ;)
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Finance
My opinion, however, is that most stupid decisions regarding our economy can eventually be traced to the financial sector. So take my comment with a grain of salt.
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CEO payouts are huge
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