Mergers Are for Suckers Deals are good for some investors--but not for companies
(MONEY Magazine) – After an almost biblical drought, mergers are back in a big way. J.P. Morgan Chase and Bank One started the ball rolling with a $58 billion deal earlier this year. Then AT&T Wireless auctioned itself to Cingular for $41 billion in cash, and cable giant Comcast launched an unsolicited bid for Disney. And those are just the headlines. In the first two months of 2004, nearly 1,000 corporate combinations have been announced, the most since 2001, says Thomson Financial. The deals so far this year are worth $230 billion.
For a handful of investors, this is very, very good news. If you're an AT&T Wireless shareholder, for example, you're about to pocket $15 a share for a stock that hadn't seen double digits in two years. But for the rest of us--shareholders in acquirers, or investors in buyout targets who get stock instead of cash out of the deal--mergers are a murkier proposition. Every CEO and investment banker playing the M&A game will work overtime to convince shareholders that one plus one equals three. Sure, maybe it didn't work out so well with AOL and Time Warner or for Daimler and Chrysler, but they'll do their best to make you forget that. And you'll be tempted by the big possibilities. Deal fever doesn't just distort the thinking of CEOs; it infects the stock market, the media and even buy-and-hold investors. Takeovers make for great drama, and handicapping the next potential target is fun.
But after the euphoria has waned, mergers can be tough on the investors who stick around. "The bigger the merger, the more painful it is and the longer it takes to see the benefits," says Maira Thompson, portfolio manager with Clark Capital Management, which owns shares in J.P. Morgan.
What goes wrong? When shareholders approve a deal, they put a lot of faith in fuzzy math. They see huge cost savings from eliminating redundancies, the competitive benefits of bigness, and ways that the strengths of one company will offset the weaknesses of the other. But even though everyone knows that accomplishing all of the above is easier said than done, investors are always dejected when it doesn't happen quickly. With expectations so high, any slip can lead to a sell-off. And knowing that investors aren't patient, managers become so obsessed with reaching their ambitious financial targets that they can end up making decisions that hurt the company in the long run.
If you own a company that's buying, be skeptical. And if you hold shares in a firm that's about to be bought, this may be a good time to take money off the table. Still want to play the merger craze? Here's a smarter way: Buy the matchmakers, such as Morgan Stanley (MSW) or Goldman Sachs (GS). They always get their fee, even when the marriage ends in tears.