What ebbing tide of megamergers leaves behind

The historymaking wave of corporate mergers and acquisitions in the United States shows signs of slowing down.

So far this year, there have been more than 9,900 deals worth a record $1.74 trillion. That's more than the previous record of $1.6 trillion in 1998, notes Thomson Financial Securities Data, a Newark, N.J., firm.

But a shuffling economy and tumbling stock prices make takeovers more difficult. In excess of $1 trillion of this year's deals hung on stock swaps.

November was a slow month in deals and dollar volume, perhaps the start of a trend. "I wouldn't be surprised if going ahead there will be a flattening out," says Thomson official Richard Peterson.

Another reason why fewer corporations may get hitched is that investors and executives increasingly recognize the high risk of failure. Most mergers, several academic studies show, don't brighten a firm's financial statements. Profitability declines. And many end in divorce, divestitures, or public acrimony.

To make an acquisition, the buyer must pay a higher-than-market price for the company being taken over. Often, though, the stock price of the buyer slips with news of the merger.

"There is skepticism out there," says Mario De Rose, a strategist with Edward D. Jones, a brokerage house based in St. Louis. "Analysts want to look at them and see if the merger makes sense."

Often they conclude the price of the acquired company is too steep. That doesn't matter too much, from an investor's standpoint, when the stock market is rising dramatically. It is different when stock prices are falling.

In May 1999, toy company Mattel Inc., paid $3.6 billion in stock for The Learning Co., a software producer. It was far too much. In June, it sold one Learning Co. program for $100 million and the rest of the loss-making firm in September for no money down and an undisclosed sum.

Investors are realizing that the promises by executives of great things resulting from a merger are more often hype than accurate forecasts.

One example is the DaimlerChrysler merger. A major investor in Chrysler, Kirk Kerkorian, has just filed suit, claiming he was misled in voting his stock for the deal. Shares of the merged company have fallen 57 percent since the deal closed. This has cost Mr. Kerkorian $1 billion.

So why do companies engage in the merger game when so many go sour?

"To some extent it is just optimism," says Peter Cappelli, a management professor at the Wharton School in Philadelphia. "The executives figure they are the ones who will pull it off. Hope springs eternal."

Often the key corporate strategists - the chief executive officer and the board - decide a takeover or merger is promising. But they don't get the views of those who will actually carry out the details of a merger.

And it is often the implementation that messes up. Blending two corporate cultures is difficult. Often key personnel flee. Office politics get in the way.

"A proclamation that two companies will be equal in the new organization is often more for face-saving than what actually happens," notes Albert Foer, president of the American Anti-trust Institute in Washington.

Ambition also motivates mergers. "Some mergers play to the power drives and ego of key executives," says Mr. Foer.

In some cases, the brass get higher pay when they head a bigger company. This may not be so important, though, if stock options and other incentives based on corporate performance truly affect executive pay.

Other executive motives, the experts say, include obtaining a larger market share and thereby possibly shaving competition; acquiring new technology quickly (a la Cisco or Microsoft); and building a global-size company to handle globalization better.

Modern communications - e-mail, fax machines, teleconferences, etc. - make managing a geographically widespread company more feasible - though not necessarily better managed.

Professor Cappelli suspects transborder mergers - so popular in recent years - may slow in the next five to 10 years as possible targets diminish in number.

Congress is currently considering a measure that could cut the number of mergers reported to the antitrust agencies by about half. A provision of an appropriations bill would raise the threshold for reporting mergers to the Federal Trade Commission or the Justice Department's Antitrust division. Under the Hart-Scott-Rodino Act of 1976, any merger valued at less than $15 million need not report. The bill would raise this to $50 million.

"That's not necessarily a good thing," says Foer. But, he adds, perhaps state governments will step in to stop or modify smaller transactions with damaging regional anticompetitive aspects.

Even should the bill pass, Washington antitrust agencies can expect plenty of action.

(c) Copyright 2000. The Christian Science Publishing Society

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