Wednesday, February 27, 2008

Mergers in a Time of Bears

Most mergers fail.
If that's not a bona fide fact, plenty of smart people think it is. McKinsey & Company says it's true. Harvard, too. Booz Allen Hamilton, KPMG, A. T. Kearney — the list goes on. If a deal enriches an acquirer's shareholders, the statistics say, it is probably an accident.
But a new study puts a twist on the conventional wisdom. It's not that all deals fail. It's just that timing appears to be everything. Deals made at the very beginning of a merger cycle regularly succeed. It's the rest that fall flat.
The study, published in this month's Academy of Management Journal, found that deals struck in the first 15 percent of a consolidation wave tend to do well, at least measured by the acquirers' share performance against that of the broad market. The duds come later, when copycats jump on the bandwagon. Even in the merger game, there's a first-mover advantage.
The problem is that most C.E.O.'s don't have the guts to make acquisitions when everyone is running scared. That is usually during a volatile market — like the one we're living in right now. Which is exactly the wrong approach.
Notwithstanding Microsoft's $44.6 billion takeover bid for Yahoo or Electronic Arts' $2 billion offer for Take-Two Interactive, 2008 is going to be an abysmal year for deal-making. Volume in mergers and acquisitions has plummeted 37 percent this year in the United States, according to Dealogic. (Factor out Microsoft-Yahoo and the drop is a whopping 56 percent.) That's partly a result of the private equity folks' being taken out of the equation because of the credit crisis. But it is also because C.E.O.'s and boards become paralyzed when the markets turn turbulent. Instead of making investments, they hunker down and focus on putting their houses in order. Remember those pundits who said corporations would fill the void left by private equity? They were wrong — only they shouldn't have been.
Baron Philippe de Rothschild, ever an opportunist, is said to have advised, "Buy when there's blood in the streets." Investors like Warren Buffett do just that all the time. Hedge funds have been set up specifically to take advantage of carnage in the markets.
But for some inexplicable reason, many corporate C.E.O.'s can't seem to stomach making a big deal when the going gets tough.©NYT

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