ARE MERGERS PAYING OFF.

AuthorMarshall, Jeffrey
PositionMany mergers disappointing - Industry Overview

Some are, but as the FASB prepares to end pooling, evidence is mounting that many big-name mergers have been far from successful. Whether it's financial or structural -- poor pricing, clashing cultures, poor due diligence or weak integration -- far too many have disappointed investors.

Poor Barbie ended up on the barbeque.

Mattel Inc., the toymaker that is virtually synonymous with the best-selling doll, saw an opportunity to diversify into non-toy products two years ago. It was riding high with solid earnings and a strong stock price, and went after the Learning Co., an educational software firm that it soon acquired for $3.5 billion.

But it was Mattel that learned a hard lesson. The merger was ill-conceived -- Mattel didn't know the software business -- and within a matter of months the Learning co. was put on the block, selling last year for no cash upfront. Mattel's earnings took a drubbing, with per-share earnings falling from $1.11 in 1998 to a 29-cent loss in 1999 and a loss of $1.01 last year.

With that, Mattel's stock plummeted as well, falling sharply in 1999-2000 and starting this year off a full 60 percent from two years earlier. The Learning co. deal ended up as the last straw for Mattel's board, which fired beleaguered Mattel chief executive Jill Barad last year.

While few mergers end as badly as this one, to a disconcertingly high degree, U.S. mergers completed in the past few go-go years have failed to deliver on their promises. By one common Wall Street watchword, three of four mergers consummated today will fail to meet expectations. And it's not just the late 1990s that get a weak report card. A prominent airline analyst recently concluded that of 18 airline mergers completed in the 1980s, only one had "positive incremental benefits" -- essentially because the acquirer saved millions by firing the target's entire management team.

Considering all the deals that have been done across industries by sophisticated companies, why is the record so poor? There is no simple answer, and indeed, there are rafts of shoals that mergers can founder on: poor pricing, cultural and/or people issues, poor planning, bad timing, weak integration. Ray Beier, U.S. leader of Structuring Services at PricewaterhouseCoopers, frames the issue simply: "Was the merger ill-conceived? Or was it strategically good but poorly executed?"

In either case, instead of new dynamism, many combined companies suffer customer and executive defections, dissension over strategy and morale woes. So, what often begins in euphoric public handshakes ends in acrimony. At worst, plaintiffs' lawyers hover like vultures, then swoop down when the stock tanks and the company's bones are exposed.

Mattel has plenty of company. Among the poorer-performing mergers of recent years were First Union-CoreStates Financial, AT&T-NCR, Conseco-Green Tree Financial, Aetna-Prudential Healthcare, and HFS-CUC (which combined to form Cendant). In several cases, chief executives and their top lieutenants were eventually forced out -- albeit with generous severance packages. A couple of recent deals, Daimler-Chrysler (see "Daimler Hits Some Potholes," page 29) and MCI-WorldCom, have also generated little good news to date.

To be fair, a sizable number of mergers have been successful, giving companies reach into new markets and more powerful product sets -- as well as higher stock prices, probably the ultimate criterion for public companies. Several huge mergers from last year -- Exxon-Mobil, Pfizer-Warner Lambert and Philip Morris-Kraft -- are generally considered good deals, as are earlier mergers involving Washington Mutual-Great Western and Wells Fargo-Norwest in the banking world. FleetBoston Financial Group's merger prowess was profiled in the January/February issue of Financial Executive.

A number of technology-based mergers have also done well, and not just those involving renowned deal mavens like Cisco Systems. Open-wave Systems, the company resulting from the combination of Software.com and Phone.com, recently reported that it reached profitability a quarter ahead of its target date, and raised its estimates for the rest of 2001.

Yet, happy stories appear to be the exceptions. Historians looking back at the 1990s will see an M&A business booming along, fueled by a high-octane mix of soaring profits, an explosion in technology, inflated corporate egos and a favorable accounting and regulatory climate. Not surprisingly, the boom was abetted by investment banks eager to reap rich advisory fees. Until 2000, there had been eight straight record years of M&A activity. That began to cool, understandably, when many high-flying tech stocks plunged to earth and the overall economic outlook soured. Weaker stocks, of course, make it harder for companies to use stock for acquisitions.

Regulators have been watching all of this closely. The Financial Accounting Standards Board has been engaged in a very public, controversial effort to modify existing merger rules, After many months of deliberations and redeliberations, the FASB is preparing to issue a final rule that would disallow the pooling-of-interests treatment for mergers, which could slow down the merger machine noticeably -- but perhaps not as much as some might think (see "FASB Readies Grave for Pooling," page 31). Figures show that only 9 percent of U.S. deals used pooling in 2000, down sharply from 53 percent in 1998 -- no doubt a reflection of many tech companies struggling mightily last year and sitting out the deal dance.

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