How megamergers got cool again
A look back at the golden age of M&A, from 2006 to 2016.
By Susanna Hamner, Business 2.0 Magazine

(Business 2.0 Magazine) -- Editor's Note: This is a fictional story set some time in the future.

When the former CEOs of Apple and Toyota unveiled the 2017 iBrid yesterday, they weren't just showing off a revolutionary computerized car that parks itself and functions as an office with built-in Mac, iPod, and heads-up display.

apple_honda.03.jpg

They were also vindicating their decision to form iToyota in the first place - and, in a way, helping to explain why the past decade became the golden age of megamergers.

At the dawn of the 21st century, it seemed as if the era of the giant corporate merger was drawing to a close. The value of U.S. takeovers hovered around $500 billion from 2001 to 2003 - hardly chump change, but a dramatic decline from the $1.3 trillion worth of deals in 2000.

See the projected financials of the megamerged companies.

AOL's takeover of Time Warner (Charts) and Hewlett-Packard's (Charts) swallowing of Compaq were considered cautionary tales, tearing the fabric of each company's culture and destroying the careers of the executives who engineered them.

But as the economy picked up steam in 2004, so too, without any great fanfare, did the M&A business.[See footnote 1] By the first quarter of 2006, the value of M&A activity around the globe averaged $10 billion a day, the highest since 2000. American M&As for the quarter totaled $311 billion, a 5 percent increase over the previous year.[See footnote 2] By the end of 2006, U.S. takeovers once again topped $1 trillion.

It was the beginning of a decade-long megamerger renaissance, an unprecedented era of the most outrageous and unpredictable pairings in corporate history.[See footnote 3] A robust economy meant that large companies were loaded with extra cash and were keen to get an edge on the competition. Most industries consolidated into three dominant companies[See footnote 4] that preferred portfolio-broadening acquisitions to internal R&D.

"With only a few dominant players in most industries, you need different niches to spread the risk," says Tony Buono, professor of management and sociology at Bentley College in Waltham, Mass.

The first surprising merger of niche players came in 2008, when FedEx (Charts) and Starbucks (Charts) tied the knot. The resulting giant, FedEspresso, became a second home to road warriors and telecommuters. Its stores stayed open around the clock, fully equipped with coffee, flat-screen TVs, Wi-Fi, and global shipping that allowed packages to move, inter-coffeeshop, within hours rather than days. By 2010 the company's profit had reached $4 billion.[See footnote 5]

Later that year software giant Microsoft (Charts) finally got a leg up on main rival Google (Charts) by acquiring Verizon Wireless and implementing the kind of seamless IP delivery services it had long dreamed of.[See footnote 6] TV on cell phones became a mass-market reality.

Next came Bank of America and Merrill Lynch. This mutually beneficial takeover in 2009 raised few eyebrows.[See footnote 7] With increased lending capabilities, Merrill strengthened its investment banking operations, while Bank of America gained a formidable brokerage arm. Now the company is the most powerful and profitable bank in the United States.[See footnote 8]

At the close of 2009, United Airlines snapped up SuperShuttle International, turning the nearly defunct airline into a Wall Street darling when it proved that road warriors would pay an extra $100 for hassle-free door-to-door travel. United fliers are now checked in on their doorsteps and don't have to touch their luggage until they're dropped off in their destination city. This process saves an average of 90 minutes at the airport.[See footnote 9] United Shuttle's sales soared to $23 billion by 2011.

Then came the record $20 billion Wal-Mart and General Motors merger of 2010, just in time to save the struggling automaker from a second spell in Chapter 11. Wal-Mart had shown itself to be interested in auto sales as early as 2002, when a brief experiment with used cars fell flat. But Wal-Motors did it right. Not only could you pick up your discounted Chevy or Buick at the store, but you also got a free tune-up with every $100 in purchases.[See footnote 10]

With his main rival grabbing all the headlines, Bill Ford Jr. knew he had to make a spectacular M&A play of his own. That was why his company merged with Boeing in 2012. Later this year we'll finally see the fruits of that merger, when Ford Aerospace rolls out the much-anticipated hydrogen-fuel-cell-powered BoFord, a "personal air vehicle," which looks like something that escaped from the set of Star Wars IX.[See footnote 11] The rush of preorders alone prompted the company to spend $3 billion to build three new manufacturing plants across the country, creating 10,000 new jobs.

That deal was overshadowed a year later, when Toyota made the $75 billion offer for Apple that created iToyota. Critics were apprehensive about the linguistic, geographic, and cultural divides. But the buzz over the launch of the iBrid,[See footnote 12] which analysts estimate could sell 10 million units a year, has silenced those lingering doubts.

So far, the unprecedented wave of mergers has brought profits, innovation, and prosperity in its wake. But they could easily go awry. Managers may overestimate their own abilities. Cultural differences could become too profound. Acquirers could overpay for companies and find themselves unable to recoup the costs.[See footnote 13] Still, after a decade-long buyout boom, the megamerger still seems like a good bet.

[1] M&As totaled $760 billion in 2004, according to FactSet Mergerstat. [2] According to Dealogic. [3] "No Sign of an End to Mergers Boom, Says Goldman Chief," New York Times, April 27, 2006. [4] "The Rule of Three: Surviving and Thriving in Competitive Markets," by Rajendra Sisodia and Jagdish Sheth, Free Press, 2002. [5] As suggested by Tony Buono. [6] microsoft.com/presspass/features/2006/mar06/03-21TelecomNEXT2006.mspx. [7] "Consolidation of the Banking, Brokerage, Insurance, & Asset Management Industries," Tiburon Advisors, Aug. 19, 2005. [8] "The deal would make perfect sense," says Samuel Thompson Jr., director of the UCLA Law Center for the Study of Mergers and Acquisitions. [9] As suggested by Rick Maurer, management consultant with Maurer & Associates. [10] "This deal would make sense because Wal-Mart brings its global retailing prowess, huge stores, and deep experience of how to create a massive, low-cost workforce," says Kurt Kunert, publisher of FactSet Mergerstat. [11] Boeing produced a personal air vehicle prototype in 2004. [12] Toyota unveiled its first computerized feature, a "parking assist" option, on the Prius in 2004; in 2006 it unveiled the Endo, with LCD screen and desktop computer functions. [13] "On paper, [merged] companies can look great, but in reality, they can be disastrous," says Tom Taulli, author of "The Complete M&A Handbook."

Why gambling at the office pays. Top of page

Marriages of convenience
The M&A boom has created dozens of giant companies that may have seemed unusual a decade ago - but the synergies were hard to resist.
New Merged Company Company 2006 Revenue1
(in Billions)
2016 Combined Revenue2
(in Billions)
Wal*Motors Wal-Mart
General Motors
$352.00
$167.80
$881.20
iToyota Toyota
Apple
$193.80
$19.80
$291.10
Ford Aerospace Ford
Boeing
$148.30
$60.40
$268.50
MSW Verizon Wireless
Microsoft
$91.60
$46.90
$233.10
America's Bank Bank of America
Merrill Lynch
$72.60
$30.80
$142.50
citibet Citigroup
Harrahs
$88.90
$9.50
$140.60
FedExpresso FedEx
Starbucks
$33.80
$8.20
$84.90
GoogleShack Google
RadioShack
$10.30
$5.00
$44.10
United Shuttle United
SuperShuttle
$19.60
$0.07
$26.50
Notes: 1Based on the median of analysts' estimates. 2Based on the companies' projected growth as well as growth in GDP.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.