Certainly, there are a few bolt-on, closely related deals made during the early stages of the economic cycle which beat the 67 percent failure level somewhat. 1

But such relatively modest deals are not the type of transaction that are likely to set hearts at Dewey Cheatem & Howe Investment Bankers aflutter.

Unfortunately for the investment banker seeking to fill his deal quota regardless of the value canage inflicted, small bolt-on deals are relatively inexpensive, with corresponding low advisory fees. Even worse from Dewey Cheatem´s perspective, management of the target company are likely to already be well-known to the would-be acquirer, effectively eliminating any sizable role for the financial ferrets.

The mega-acquisition was once treated as the CEO´s right of passage, confirmation of the executive´s prowess as an astute industrialist. Crowning glory for a great career, the stuff of fawning biographies in later years.

No longer. Personal career and corporate value risks associated with the major deal massively outweigh the advantages, regardless of occasional exceptions such as Hewlett Packard´s acquisition of Compaq, expertly planned and navigated by H-P´s chief executive, Carly Fiorina. 2

When the CEO sticks her or his head above the parapet and announces pursuit of the large, high visibility target, others on the Board and across the company find themselves swept up in testosterone mania comparable to war-lust.

Woe to the CEO who loses that war, even if ‘losing´ happens because of his astute, value-maximizing decision to avoid overpayment. This chief executive quickly finds himself shunted aside, treated as a corporate embarrassment. The closest equivalent is the leader of a political party who just lost a presidential election in a landslide. The Board cannot act quickly enough to get rid of this embarrassment.

The penalties of ‘winning´ the war are often even worse, although the day of reckoning is delayed. Unless the deal begins to unravel quickly in the first three quarters after the close (such as Quaker Oats-Snapple, AT&T-NCR, Compaq-DEC or Vivendi-Universal), a CEO with an especially skillful internal spin-doctor might delay the extent of the value destruction for a couple of years at least. In all the forementioned transactions, the acquiring company chief executive was gone in a couple of years).

As Spring 2003 blooms, one cannot help but notice the proliferation of planted articles in the business and financial press about the coming resurgence of major merger activity, despite the fact that evidence points to the opposite conclusion.

Price-to-earnings multiples remain high today on a historical basis, particularly in technology and service sectors. Precedent suggests that until and unless those price-to-earnings multiples reach new lows and remain there for some time, the bottom-feeder acquirers who spark the beginning of any M&A resurgence remain on the sideline. Other factors strengthen the P/E case. Overcapacity is extensive today, which means that would-be acquirers can (and will) expand organically at far lower cost.

Given the solid facts stacked against the M&A resurgence argument, who then is paying the papers for the planted articles trying to make generate false momentum nothing. Those pumping the hallucinatory gas are the same ones who are in a position to benefit most from a return to M&A insanity, regardless of how many billions of shareholders´ dollars are destroyed. That´s right: your friends at Dewey Cheatem, or at least those still remaining after the Spitzer cleansing.

Notes:

1

The most widely accepted measure of acquisition success or failure is whether the returns over time (five years is usually the time period used) exceed the returns that providers of capital could alternatively achieve by putting the same funds in available very low risk investments such as US Treasury bonds. On this basis, about two-thirds of acquisitions fail. (Clark, Peter J., Beyond the Deal: Optimizing Merger and Acquisition Value, New York, Harper Business, 1991).

2

Fiorina´s success appears to have been largely based upon H-P´s careful examination of what works (and what doesn´t) when it comes to successful postmerger integration (PMI) of technology companies, including Compaq´s snakebit acquisition of Digital Equipment Corporation in the mid-‘90s. PMI is addressed in Section II of Beyond the Deal.
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