Yes, merger mania seems to be back but, as always, the operative word is probably the latter of the two. Studies routinely show that mergers often (even generally) do not work out. The benefits of the deals are oversold, concerns about any shortcomings are brushed aside, and once negotiations are entered into – especially if there are competing buyers – the rationale for the deal begins to turn on the self-absorbed reputations of the deal makers rather than the merits of the deal. When this happens, the price paid is often too high, enough so to doom an investment consummated under financial terms that now violate already strained assumptions.
For example, as pointed out in a recent New York Times item, many of these deals are entered into as sterile cash-flow enhancing investments. The cost of debt is low, often for a peculiarly temporary reason, making deals that otherwise wouldn’t make sense seem profitable, even urgently so. The problem is, this is the opportunistic thinking of a speculative investor, not the strategic thinking of a senior manager or board director.
All-too-many mergers have not only failed to work – they have done damage to the merged parties, usually, in particular, to the purchasing side. However, there are some success stories. A key one, also mentioned in the article, is that between Procter & Gamble and Gillette. This, as noted in that item, was a successful blend of two similar companies seeking to enhance both their efficiencies and their market force.
Moreover, as noted in another NYT item, these two companies’ managements have demonstrated the strategic poise and operational judgement to learn from each other – another benefit they derive from their deal. For example, P&G has long marketed to women, and Gillette to men; they have learned from each others’ expertise and knowledge about these markets.
Additionally, and of particular interest, P&G has typically run regionally-tailored campaigns for its products, and Gillette global campaigns. They have all looked closely at the reasons underlying these approaches, and learned how to adapt them across the new firm to each other’s current products and new launches in effective and imaginative ways.
When you hear managers touting the reasons for the value of the deals they are pursuing or announcing, look for evidence of the type of thinking that is behind this. Is it a short-term cash-flow mentality, albeit hidden behind cosmetic blandishments about synergies and cross-selling opportunities and the like, or is it strategic and concerned with the long-term shape and direction of the new entity?
As a manager, when such deals are promoted to you by consultants or, especially, by investment banks, look for the same sort of evidence, and push hard to be sure you have it. Don’t allow yourself to fall prey to merger – or, especially, to manager – mania.
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