Merger Mania
Merger mania is in full swing. The legendary corporate raider Carl Icahn is
on the prowl. European chief executives are spending billions buying
everything from American money management firms to movie companies.
Takeovers are widespread in almost every industry. The scale and scope of
the current merger wave is forcing the anti-trust regulators to take a more
skeptical look at some proposed deals. For instance, Worldcom and Sprint
are expected to call off their $115 billion merger because of regulatory
resistance.
Yet what fascinates me is that most of these mega-buck deals will waste
money and time. Indeed, many mergers struck with great fanfare only a few
years ago are now coming up a cropper. First Union will take a $2.6 billion
charge--yes, that's $2.6 billion--to shut down the Money Store, the
consumer lender it bought in 1998. The stock price of Conseco, the nation's
eighth largest life insurance company, has plunged by 90% over the past two
years, largely dragged down by its $6 billion purchase of Green Tree
Financial. Hilton Hotel shareholders are glum at the mere 4.6% return
they've earned over the past four-and-a-half years despite billions in
acquisitions and spin-offs.
Several forces are behind the current merger wave. Intense, perhaps
unprecedented levels of competition are driving many companies to
consolidate in an effort to cut costs and boost revenue. The promise of the
Internet and other telecom innovations are bringing many companies
together, too. Then there is the impact of ego--the huge egos in executive
suites.
The empire-building strategy often isn't worth the price. The
consulting firm KPMG analyzed 700 of the highest priced deals from 1996 to
1998 and found that 83% failed to boost shareholder value. More than half
actually lowered it. When it comes to mergers, the old Wall Street adage is
apt: Caveat Emptor.
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