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back to article Why mergers LOSE money, but are GOOD for the economy

So the distribution sector has had yet another round of consolidation. Mergers, takeovers - these are the things that make an M&A banker's heart* thumpety-thump with joy. The big question, though, is whether this actually does any good for the shareholders of the various companies - you know, the people who actually own them? …

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What's a merger?

Isn't that just where one company purchases another using its own stock as payment?

I think you hit the nail on the head with Thumpety Thump, often these things are 'suggested' to top guys by M&A banker types as a way of doing something big and newsworthy when there's no cash around,or at least there's only enough cash to pay $100m to the bank/lawyer to organise it, not $10bn to acquire outright.

What fun!

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Re: What's a merger?

Most mergers are so the CEO has "done something".

CEO at companyA - slow and steady, grows market a bit, money in the bank, happy workforce = laughing stock.

CEO at companyH - 'invests' $8bn in iBuzzword-cloudy thing that they eventually shut down = a Big Swinging Dick for heading up a multi-billion $ merger and being a forward thinking visionary in the iBuzzword technology. Gets hired by companyA whose current CEO hasn't made any $Bn investments.

The other alternative is either to split the company into competing business units to enhance competitiveness - or (if the last CEO did this) merge the competing business units into one giant company to enhance efficency.

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Anonymous Coward

Can anyone

Suggest a merger that has NOT lost HP gazillions?

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Anonymous Coward

Re: Can anyone

Yes, but I wouldn't call that a failure of M&A as a strategy. HP has just made a string of poor acquisitions, which everyone knew were long shots from the outset (Compaq, Palm, EDS, 3COM, Autonomy).

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Mergers as genuine cost savers or to access markets

Didn't see that mentioned

take two companies in similar business

Company A has tatty old office block and brand new factory with room for expansion

Company B in the next town has office space but an ancient factory filled with new machines.

A merger should see that "A&B Ltd" has the latest equipment in a modern efficient factory and its combined head office staff working not far down the road. Being a bigger player they can tender for larger contracts. and they have two brownfield sites to sell off for redevelopment.

In theory......

Equally, the management merge the two business, lay off the workforce at one site while moving the machinery to the other where they get the factory floor to work twice as hard. Squeeze the office staff into a spare corner of the factory and sell off three sites for housing. Then it's down to the golf course for "a good walk ruined" before into the clubhouse and doubles all round.

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Holmes

Re: Mergers as genuine cost savers or to access markets

Take two companies in similar business

Company A has a decent business with 400+ employees but is not growing.

Company B would like to buy Company A's assets but wants the lowest price.

The CEOs of both companies make a silent deal. The CEO of Company A agrees to make "bad decisions" that cause the price of their stock to drop and also lays off employees until only 60 are left, so Company B can buy Company A cheap while not being seen as laying off hundreds. In return, as part of the buyout Company A's CEO gets a multi-million dollar bonus (on paper, it's money set aside in escrow for, um, "other expenses"). Companies C, D, and E also try to buy Company A but A's CEO finds something wrong with each deal and rejects them all.

A's CEO makes out, B makes out, A's shareholders get royally screwed.

More and more common worldwide.

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Coffee/keyboard

Re: Mergers as genuine cost savers or to access markets

Your scenario is illegal in western economies. It may be considered either: shareholder fraud, fiduciary fraud or even insider trading. The free flow of information on price, value, strategy and business arrangements/strategies is an essential part of an efficient market.

On the economics side of this discussion, setting prices and values of assets are central to and efficient business environment. This can only be done on a case by case basis. Economists are generally concerned to national-level statistical aggregation and could not run a business if their lives depended on it.

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Unhappy

"auction them off and get them working again. "

Excellent idea.

Funny how that option never gets a look in when banks are in trouble.

"They must be rescued at (damm near) all costs" was the cry across the Atlantic.

And so they were.

For now.

No shake out to find out what all those CDO's were really worth and no censure for the people who caused it. Who said "Capitalism without bankruptcy is like religion without Hell?"

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Re: "auction them off and get them working again. "

Well, quite.

But that's because banks and bankers are everso special super-intelligent near-deities with excellent predictive skills. And we need them - d'yhear?

It's not because the investment types are coke-snorting whore-fucking distaster capitalists who own all our politicians and actually enjoy making poor people even poorer.

Oh no.

As for crash-dump mergers helping the economy - they usually put more people out of work than they employ.

Worse, they usually put more good people out of work than they employ. (Did any of DEC's engineering excellence carry through to Compaq and HP? A few of the top types ended up in the management quagmire that is Microsoft, where they did a bit more and then...stopped.)

So - as usual - that's an odd definition of 'good for the economy', at least by most sane people's standards.

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Re: "auction them off and get them working again. "

Of course it applies to banks, that's why banco santander now owns about 10% of the UK banking system.

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If only left and right winger politicians had a clearer understanding of this...

... maybe they'd be a little more sensible in their policies.

Naturally the left's argument against shutting down firms relates to the welfare of its staff who are made redundant, even if they are clearly crap and need putting out of their misery (see British Leyland and gov support for Rover before it finally died)

The right loves the idea of bad companies being closed, but expects people to just sort themselves out , sometimes in impossible circumstances (see M Thatcher ref closure of coal mines)

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Re: If only left and right winger politicians had a clearer understanding of this...

The Govt support to Rover was a conservative govt backhander to BAe while they owned it.

It was an attempt not to look like an illegal subsidy so the Americans wouldn't object - or so they could pretend not to have a reason to object while US defense companies were courting BAe

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Rarely good for the economy, either...

It's been well known for a long time that most M&A's don't deliver for business. If you have enough cash to buy out an existing business, you almost certainly have enough cash to replicate its business model more efficiently and without its historic baggage. If you have to borrow the money, you're saddling the company you're trying to turn around with crippling debt which usually results simply in an accelerated decline.

What M&A activity does is to divert substantial amounts of money in fees and bonuses to the bankers and new directors, which is why it remains depressingly popular. In the process, the less-preferred creditors, who are also real businesses trying to grow, get pushed even further back down the queue when the acquired business goes tits up. That's really not in the interests of the economy, though it clearly is in the interests of a small number of people who know how to work the system.

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Re: ...you have to borrow the money, you're saddling ...

Good, another one who understands the downside of a highly leveraged company, when revenues take a hit. it's a shame more people are not as educated as you seem to be.

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Slow or violent death?

The idea of letting a company die peacefully is a bit overoptimistic. Once the company lost it's future purpose, every competent employee will jump ship, thereby violently accellerating the demise of said company. The illusion of a vibrant company must therefore be maintained at all cost -- up to the last throes of death.

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Modern solution: Slow and violent death

When a company is clearly doomed, the modern thing to do is sue everybody for patent infringement. While the company's products were selling, cross-licensing was the sensible choice to avoid an injunction. As soon as an injunction is not a threat it is time to sue suppliers, partners, customers and anyone else who might have money.

The other tell-tale signs of an immanent self destruction are getting your products mandated by governments and whining that the new companies eating your lunch are breaking all the rules you used to break.

The old law about mandatory archery practice was to ensure continued sales of bows despite competition from arquebuses. The modern equivalent would be to get the government to buy an extra licence for all the pre-installed software on computers used in schools even if the schools are buying Pi's.

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Unhappy

Re: Slow or violent death?

"Once the company lost it's future purpose, every competent employee will jump ship, thereby violently accellerating the demise of said company. "

Actually no.

Once companies rise to a certain size and with a certain number of competent staff it can survive almost any level of incompetence by senior management.

Why staff continue to stay is not solely limited to their skills but other personal factors.

Senior management usually are completely ignorant of this.

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Re: Slow or violent death?

I believe your last sentence contained some excess verbiage.

Here is that sentence, with the excess verbiage redacted:

Senior management usually are completely ignorant of this.

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Problem with mergers

The problems with mergers is that Megacorps buys up a smallcorp company in an area it has limited expertise. Now the small company is doing well because it has a small management overhead, is agile and therefore adapt quickly to a new and expanding market. The only thing small corp hasn't got is the capital and resources to take advantage of the market, which of course Megacorp can provide

However as soon as the merger is completed, Megacorps puts a whole new management structure on top of it making less agile, it shoehorns it into its company management structure tying it to some part of the organisation which doesn't understand the new market. Meanwhile people who made the company successful in the first place leave because they get tired of the new bureaucratic structure, the lack of opportunity and are attracted by the outside possibilities in an expanding market. In the end a possible new industry player is strangled to death and then discarded by the Megacorp management with only a few patents to show for it.

What htey should of done is keep the 2 companies separate, Megacorp by a substantial shareholding in smallcorp and bank roll the company so smallcorp has the advantage of agility and access to Megacorps resources and capital. However managers would hate the lack of control so this is never considered

Another way of looking at it is say MegaCorp is a large company say making OS and servers whose markets are steadily shrinking. It may also have a very successful word processing division but this division is held back from taking advantage of all its opportunities by the OS division and corporate strategy. It would make more sense to separate the two parts so both can concentrate on making the most money without worrying about affecting the market share of each other. Of course this never happens because the management are scared of losing control so are willing to let both lifeboats sink together when untying them would save at least one.

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Anonymous Coward

Re: Problem with mergers

You have just described what happened to the company I work for in the last year when it was bought by a "large software company"

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Boffin

Re: Problem with mergers

"The only thing small corp hasn't got is the capital and resources to take advantage of the market, which of course Megacorp can provide"

This suggests that a viable strategy for a megacorp would be to operate as an inhouse investment bank that lends (at below market rates) to their in house partnerships.

Coupled with a "hands off" management approach.

Might work.

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Anonymous Coward

Always happens

Recent Examples spring to mind:

AOL with TIme Warner - both dead/dying and what hype was there!

GE-_ Under Lord SImpson, had a pile of cah, rest is history

RBS-HBOS - both bankers (FFS they should have known - but kept it to themselves)

BA-Iberia - struggling with profits despite a very enlarged marekt to serve.

KLM- Air France - Same scenario

SOny Erissson- Sony phone division - just recovering

HP-Compaq - smaller market share

HP- and the UK accountancy company - what a joke

AMD-ATI - not doing good.

Microsoft - Skype. 8..5 billions for VOIP ( FFS they could have developed this in-house for much less)

Ford- Volvo - Where are they?

Renault-Nissan ? Just about OK

Virgin Media- NTL- Blueyonder and all other smaller telcos taken over ? Consumers the losers

T-mobile & Orange ? higher prices and less choice for consumers

Lufthansa-BMI - less choice and higher fares.

BMW-ROver ? Even pricier Minis

National and other coach operators? Same story.

Feel free to add more. Sure there are many.

All the borrowings/debts they availed has to be paid back (usually the consumers bear the burden ultimately), which was high due to the markets jacking up prices of takeover targets.

Its a one whole nice cosy setup between bankers, big business and stock market regulators who only pay lip service.

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Stop

What really happens

Despite whatever truth lies in this article, it is rather an ivory tower (or should I say, corner office) approach to the problem. I point you to T.W.'s statement:

'…the people who usually lose the most are the shareholders of the acquiring company.'

Here are the steps in the usual merger/acquisition:

1) Acquiring Co. announces merger, citing 'synergy' or some such other BS.

2) Acquiring Co. tells the employees of Acquired Co. that nothing will change, except some consolidation at the top, to eliminate duplication of effort and increase efficiency.

3) Acquiring Co. and Acquired Co. officers receive (usually massive) bonuses.

4) Acquiring Co. begins layoffs, sometimes resulting in (temporary) share price rise

5) Promised synergy and efficiency fail to appear.

6) (optional but frequent) Acquiring Co. sells off Acquired Co. assets at a loss.

Whether this is "good for the economy" depends, I guess, on how you define economy. For the workers who are laid off, it certainly isn't good for their economy, nor for that of the towns where they live, when they can no longer shop happily. This, of course, has a knock-on effect. These are the ones who lose most.

The share-owning class, depending on their acumen, may well do better (or worse), but that's the game. The acquirers of the debased assets do well, but for instance, in the case of Rubbermaid being acquired by Newell (a rather typical transaction of this kind), those assets went to China.

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Re: What really happens

Actually, it's good for GDP, which measures activity and the flow of money. So let's take the example of a smoker who dies prematurely (nothing against smokers, I used to be one - mmm full strength Marlboro). When I smoke I'm contributing to GDP. If I'm in the US and get lung cancer (assuming I can afford care) my treatment contributes to GDP because I have to pay and it employs people. When I die my funeral also contributes to GDP. The outcome isn't ideal for me, but that's not what economics measures...

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Re: What really happens

A book I remember from the last century (called, I think, "Economics: What Went Wrong and Why, and Some Things to Do About It" <http://www.amazon.com/Economics-What-Wrong-Things-About/dp/0060390379/ref=sr_1_16?s=books&ie=UTF8&qid=1357949830&sr=1-16&keywords=what+went+wrong+economics>) described very well the argument you make, but in terms of asbestos: first, asbestos is mined — people make money and the GDP is raised, then it is installed — people make money and the GDP is raised, then when it is discovered to be carcinogenic, it is removed — people make money and the GDP is raised, workers get treated by medical personnel — people make money and the GDP is raised, then there are lawsuits — people make money and the GDP is raised. None of this takes into account the harms done, to workers, to ordinary people, to corporations like JohnsManville; none of which is good for people or "the economy," but great for GDP and those who profit. Those who think money and its constructs are more important than life, people and nature itself are suffering, IMHO, from a mental disorder — and we are much the worse for it, because it is considered laudatory and normal!

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Destructive takeovers

The other form of takeover is the destructive one. If I (Megacorp plc registered Lichtenstein) feel threatened by a new upstart I can take them over, skim off any valuable IP, "redeploy" their human assets and sell off anything else worth selling. I win and the shareholders may well win because the competition has been neutered. Unrestricted capitalism naturally favours monopolies.

An advanced variation can be found if you look at what happened in Russia after the end of Communism. With a total lack of effective regulation you had a period of anarcho-Capitalism. Here the takeovers were carried out with extreme prejudice, eventually leading to huge monopoly companies which in turn became arms of the state.

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Trollface

Re: Destructive takeovers

Bah you lie. According to the right wingers unfettered markets are the closest thing to God and any government regulation is evil. When you point out the extremes of the conditions in Somalia (zero government) or a dozen robber trust barons of the Industrial Revolution owning everything (government not intervening at all) they go back to talking about dirty socialist liberals instead.

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Coat

Oh how things change

I remember the days when companies would get taken over for their surplus cash, or their pension fund actuarial surplus.

That was back when making actual profits was an important thing.

Stockholders seem to be treated with absolute contempt by management these days and pisspoor CEOs and CFOs play leapfrog with each other while dodging the responsibility for the messes that they keep leaving on the carpet. They can only do this cos lots of corporate fund managers are so stupid they blindly follow gambling tips from the house underwriters' IPO valuations and follow each other like sheep laying all their eggs in the same basket.

As for killng firms off the usual way would be that they get picked to bits and flogged off or they get shelled and filled with something completely new - I would have thought that actual bankruptcy of a public quoted company would be relatively rare.

Its the one with the P11D in the pocket.

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Trollface

Re: Oh how things change

>Stockholders seem to be treated with absolute contempt by management these days

Probably has a lot to do with much of the shareholder money being in middle class 401K, IRA's and pension funds which by law have severely restricted rights compared to the rich people's hedge funds. Lol middle class shareholders having a say hahaha good one.

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Re: Oh how things change

Allow me to correct part of your second paragraph:

`Stockholders seem to be treated with absolute contempt by management these days and pisspoor CEOs and CFOs play leapfrog with each other while dodging the responsibility for the messes that they keep leaving on the carpet. They can only do this cos lots of corporate fund managers are so stupid they blindly follow gambling tips from the house underwriters' IPO valuations and follow each other like sheep laying all their eggs in the same basket lemmings gleefully following one another off the cliff`.

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FAIL

The success of capitalism

Capitalism occasionally makes a few people rich for a while, but on the whole it fails, to be bailed out by governments at great cost.

Mergers are an expensive way of eliminating competitors, thus somewhat less destructive than armed violence.

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Re: The success of capitalism

I've yet to see Capitalism at work. The bailouts are precisely where the problems lie -- it's not Capitalism, it's thinly-veiled Socialism with tolerated Personal Property (unless said Personal Property needs to be taken over by the Government to support its own interests).

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Unhappy

there *is* one case I know of where "Megacorp" seems to have left well enough alone.

That is Northrup Grumman's ownership of Scaled Composites.

They seem to operate a pretty hands off policy and it seems to work.

Perhaps there are other examples, but I don't know any.

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Meh

ok, point4, two things..

1) buying up distressed assets is not a "merger".

2) we need plurality and divergence in our industries. big corps are killing our market spaces. e.g. if we had 100 medium-sized banks and one goes bust, big deal, go bust already, it's not going to end our civilisation. with 5 large banks, if one goes bust, it's a big deal (ok ok, apparently, so they say). also with plurality you have competition for products and price. more companies doing stuff means better stuff at better prices.

eupeople.net/forum

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Pirate

One other thing the merger is useful for

is if you seem to have actual profit lying around, that's dangerous as you might get taxed. Far better to buy out another business, borrowing a bit along the way, stay just a bit in debt and avoid being hit by the taxman. Better yet, if the company you're buying has debts you can suck them in whole and use them as a tax dodge for your main business. Again, god forbid you should ever pay dividends to the shareholders.

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Anonymous Coward

I'm reminded of this

http://www.youtube.com/watch?v=sp0RttRojk4

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