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December 13, 2004
Lesson #1: never get married
Big merger-acquisitions, such as Peoplesoft finally giving in to Oracle or Sprint and Nextel thinking about getting hitched for $35 billion, always get breathless press coverage, even though most end up as train wrecks.
Evidence shows mergers consistently destroy customer relationships and the shareholder value usually represented by pension funds, 401ks, careers... you know, the stuff most investment bankers who cheer on these mergers marginalize.
As Businessweek's Christopher Farrell wrote (subscription required) recently:
McKinsey & Co. shows that 65% to 70% of deals fail to enhance shareholder value. Consultant Booz Allen Hamilton estimated that 47% of deals didn't meet the objectives laid out by management in the merger announcement. A recent study by economists Sara B. Moeller of Southern Methodist University, Frederick P. Schlingemann of the University of Pittsburgh, and Rene M. Stulz of Ohio State University calculates that acquiring outfit's shareholders lost $216 billion from 1991 to 2001.
What hasn't been researched and reported time and again is why shareholder value is destroyed... because customers hate mergers.
Data from University of Michigan's Business School (and reported by Businessweek -- again, subscription required) indicate half of all customers whose companies have merged are less satisfied two years later. The business partners who've had their marriage arranged must decide in weeks on the metaphorical furniture, duplicative kitchens, how to raise the kids, etc.
Michael Dell has a more sensible philosophy about acquiring companies: "We acquire our competitors one customer at a time."
UPDATE: The January 2005 edition of Fortune features an exhaustive examination (subscription required) of the merger between the Church of Silicon Valley, Hewlett Packard, and the Houston-based PC upstart, Compaq.
Carol J. Loomis investigates and writes:
HP's shareholders paid $24 billion in stock to buy Compaq and in exchange got relatively little value. In fact, so little value was secured that accounting rules could force HP to write off a chunk of the $14.5 billion in goodwill assets it set up on its books after the deal. That would be a noncash charge—comparable, in a junior-grade way, to charges taken at AOL Time Warner after its debacle of a deal—but a write-off of goodwill at HP would say as clearly as anything can that, financially, this merger has been a lemon.
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65% - 70% ? wow, that's a lot higher than I would have ever thought.
Yup, yet the big-stakes gambles continue. Fortune has a comprehensive piece this month looking at the merger of HP and Compaq. The verdict: a big failure for shareholders.
In fact, I'll do a quick update to the original post about that.
