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Are Companies Too Eager To Do Big Mergers?

from the big-egos-big-mergers dept

Mon, May 19th 2008 8:38pm — Timothy Lee

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

7 Comments

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Paul Johnson, 19 May 2008 @ 9:12pm

I don't disagree except....
I think AOL Time Warner could have worked if AOL had truly taken over Time Warner and didn't pretend that it was a happy merger.
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Rekrul, 19 May 2008 @ 9:49pm

Microsoft is like The Blob, it absorbs everything in its path and just keeps getting larger.
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Eldakka, 19 May 2008 @ 10:40pm

Do execs get bonuses for mergers?
I always (mis?)understood that senior execs, boards etc often get 'bonuses' for mergers and so on, therefore they would encourage a merger because they'd get a bigger pay check.

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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Tim, 19 May 2008 @ 11:10pm

Finance
I think a lot of mergers are driven by the financial sector. It's a great way to speculate and make money and banks love mergers because they make spectacular sums off of the money they loan companies to complete them.

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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Anonymous Coward, 20 May 2008 @ 4:37am

What I read from this is that if one owns either Microsoft or Yahoo stock that it is time to sell since both companies are in trouble.
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BidMogul.com, 20 May 2008 @ 8:07am

Yes. Money and creative energy are polar opposites!
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Snidely, 24 May 2008 @ 5:57am

CEO payouts are huge
Eldakka (#3) is completely correct. CEOs jump at the chnace to merge with anyone to get a huge payout. When Sprint and Nextel merged, each CEO got a $20 million package for the successful completion of the merger in addition to massive stock benefits. Now that SN has run aground and is hemmoraging subscribers, you'd think the company wouls sue the former CEOs to reclaim those awards.
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