[Congressional Record Volume 140, Number 148 (Wednesday, November 30, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: November 30, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
           THE TROUBLE WITH MERGERS; MAKING A MEAL OF MERGERS

 Mr. SIMON. Mr. President, during the interim of the Senate 
being in session, I have caught up on some of my magazine reading and 
came across a commentary in The Economist of September 10, 1994 under 
the title, ``The Trouble With Mergers.''
  For some time, I have had a concern that we are using capital for 
nonproductive purposes, for one corporation simply to consume another 
corporation, and we compound that folly by having a tax system that 
encourages that acquisition by debt rather than equity.
  One of the things that the commentary notes: ``Many studies of 
mergers stretching back to the last century have shown that, despite 
some successes, the overall record is decidedly unimpressive.''
  There is no author indicated in The Economist piece, but I ask 
unanimous consent to insert their commentary, ``The Trouble With 
Mergers,'' into the Record at this point.
  Then I would like to insert into the Record from the same edition an 
article titled, ``Making a Meal of Mergers.'' The article is summed up 
well in the subhead: ``Corporate America has rediscovered its appetite 
for mergers and takeovers. Experience suggests that it will end up with 
indigestion.'' This British publication sees our situation more clearly 
than most of us see it. I ask that it be printed in the Record at this 
point.
  The articles follow:

                  [From The Economist, Sept. 10, 1994]

                        The Trouble With Mergers

       Camels do it, birds and bees do it, even companies do it: 
     all over America, firms are falling in love and settling down 
     together. So far this year, more than $210 billion-worth of 
     corporate mergers have been announced. The ritziest marriage 
     of all, a share swap worth over $10 billion, was announced 
     recently by Martin Marietta and Lockheed, two giants that 
     will henceforth bestride the defense industry as a single 
     colossus. Even bigger deals are said to be on the way, not 
     only in defense but also in drugs, media, entertainment and 
     many other sectors. If only a few of these are consummated, 
     their total value this year will reach levels that have not 
     been seen since the merger frenzy that swept America in the 
     1980s.
       At first glance many such mergers look eminently healthy, 
     not only for the firms involved but also for the economy as a 
     whole. They are portrayed as intelligent adaptations to a 
     changing business environment, caused variously by shrinking 
     markets (defense), government reforms (drugs and health care) 
     or technological change (media and telecoms). And unlike the 
     hostile takeovers of the 1980s, most of this year's mergers 
     have been friendly. Entailing true romance rather than 
     shotgun weddings, tempting synergies rather than financial 
     opportunism, no rash of mergers has ever seemed more benign, 
     or better calculated to boost corporate profits.
       The snag is that mergers can almost always be made to look 
     that way at the time. Troubles come later. And many studies 
     of mergers stretching back to the last century have shown 
     that, despite some successes, the overall record is decidedly 
     unimpressive (see page 87). It is not so much that marriages 
     result in asset-stripping, as the enemies of takeovers often 
     allege. In aggregate, mergers seldom lead to egregious cuts 
     in R&D, investment or even jobs (though many head-office jobs 
     vanished in some 1980s mergers). Nor is it common for mergers 
     to vindicate the fears of trustbusters, by creating price-
     rigging monopolies. No, the real disappointment about mergers 
     is that, on average, they do not result in higher profits or 
     greater efficiency; indeed, they often damage these things. 
     And although they prompt a rise in the combined stockmarket 
     value of the merging firms, this gain is often short-lived.
       Naturally not all mergers--and not all waves of mergers--
     are equal. Blessed with hindsight, most economists now agree 
     that the merging of the 1960s, when firms grouped themselves 
     into diversified conglomerates (itt, Beatrice) on the 
     strength of faddish management theories, was a disaster. They 
     have also come to agree that many of the takeovers of the 
     1980s brought lasting benefits, not least by freeing many 
     potentially robust businesses from the unwieldy conglomerates 
     created two decades earlier. Unfortunately, the ruminations 
     of tomorrow's economists do not greatly help today's managers 
     and shareholders as they tremble on the threshold of 
     corporate marriage. Is there a reliable way to predict 
     whether particular mergers are likely to succeed or fail?


                             Two can tango

       Much depends on the quality of managements. Even 
     complementary firms can have different cultures, which makes 
     melding them tricky. And organising an acquisition can make 
     top managers spread their time too thinly, neglecting their 
     core business and so bringing doom. Too often, however, 
     potential difficulties such as these seem trivial to managers 
     caught up in the thrill of the chase, flush with cash, and 
     eager to grow more powerful. Merger waves tend to arrive when 
     economies are buoyant and firms have plenty of money to 
     spend--either their own or that of willing lenders.
       For all this, not all mergers fail. And they are more 
     likely to succeed when inspired by a clear goal, such as the 
     need to reduce excess capacity in an industry. It is, for 
     example, hard to argue with Norman Augustine, who is to 
     become president of Lockheed Martin, that three full 
     factories are better than six half-full ones. Yet there are 
     surprisingly few industries, such as defense, in which the 
     strategic choice is so clear-cut.
       Consider ``vertical integration'', in the name of which a 
     multitude of mergers between telephone, cable, television and 
     film companies are being mulled or implemented. It makes 
     sense for, say, a maker of television programs to guard 
     itself against betrayal by a distributor. And managers caught 
     up in the multimedia revolution may be right to argue that, 
     if they do nothing, their firms will soon be as redundant as 
     blacksmiths after the invention of the motor car. Yet in some 
     cases it might be better for them to follow General Dynamics, 
     a defense firm that is winding itself down and returning 
     money to shareholders, than to gamble on ill-defined 
     ``synergies'' that may or may not secure a place on the next 
     century's information superhighway. Time will tell--too late 
     as usual.
       Like all waves of mergers, the present one is accompanied 
     by claims that it is more rational than its predecessors. And 
     yet a worrying feature of the current wave is the very 
     friendliness that so many admire. Most hostile takeovers at 
     least have the merit that they seek to replace the incumbent 
     managers with others who, the buyer believes, can run the 
     firm better. Since the 1980s new laws have made hostile 
     takeovers difficult unless the managers of the target firm 
     put themselves in play by starting merger talks with another 
     firm. If a takeover does not install a fresh management, the 
     justification in terms of synergies or economies of scale 
     needs to be all the stronger.
       Ultimately the success of an individual merger hinges on 
     price. By definition, shareholders of acquired firms are 
     happy with their dowry, or they would not have parted with 
     their shares. By contrast, shareholders of acquiring firms 
     seldom do well: on average their share price is roughly 
     unchanged on the news of the deal, then falls relative to the 
     market. Part of the reason for this is that lovelorn company 
     bosses, intent on conquest, neglect the needs of their 
     existing shareholders. At this time of corporate romancing, 
     these shareholders might usefully offer such bosses some sage 
     parental advice, along the lines of: take your time, play the 
     field. Otherwise, they may end up in bed with a camel.
                                  ____


                  [From The Economist, Sept. 10, 1994]

                        Making a Meal of Mergers

       Corporate America has rediscovered its appetite for mergers 
     and takeovers. Experience suggests that it will end up with 
     indigestion.
       Merger mania is again sweeping down Wall Street and up Main 
     Street. With over $200 billion of deals clinched already this 
     year, the total for 1994 could easily reach levels not seen 
     since the boom years of the late 1980s (see chart on next 
     page). The market is awash with rumors of possible mega-
     deals: a General Electric bid for American Express, perhaps, 
     or a buy-and-break-up move for Time Warner, an unwieldly 
     media conglomerate formed through a merger in 1989. Whole 
     industries are thought to be ripe for mergers--ranging from 
     defense to multimedia. It is enough for the historically 
     minded to talk of American business's fifth great merger 
     ``wave'' in just over a century.
       Bankers are rubbing their hands with glee at the prospect 
     of some juicy fees. Shareholders are hoping that their firms 
     might become bid targets, since that would send the stock 
     price soaring. It is a good time, therefore, to pause and 
     consider some of the lessons of America's previous four 
     waves--in the 1890s, 1920s, 1960s and 1980s. Many studies 
     have looked at why these merger waves happened, and what they 
     achieved. Most make grim reading.
       Useful articles include: ``The Takeover Wave of the 1980s'' 
     by Andrei Shleifer and Robert Vishny, Science, August 1990; 
     ``Do Bad Bidders Become Good Targets?'', by Mark Mitchell and 
     Kenneth Lehn, Journal of Political Economy, 1990, no 2; and 
     ``Mergers'', by Dennis Mueller, the New Palgrave Dictionary 
     of Finance, 1992.
       No study has been able plausibly to explain why mergers 
     happen in waves. The most obvious possibility, that at some 
     times firms are systematically under-priced, is easily 
     dismissed. Merger waves have, on the contrary, usually come 
     when stockmarkets are valued above their long-run average.
       A second possibility is that a bunch of mergers happen 
     together thanks to a sudden change in a particular industry's 
     market conditions. Mark Mitchell, an economist at the 
     University of Chicago, points out that in the 1980s mergers 
     were especially prevalent in industries experiencing rapid 
     technological change, deregulation, price shocks or increased 
     foreign competition. The same appears to be true now, with 
     mergers clustered in such fast-changing industries as 
     banking, defense, telecoms and health care.
       Although this is clearly part of the story, such industry 
     changes do not explain why mergers have happened when 
     stockmarkets are buoyant. Andrei Shleifer, an economist at 
     Harvard University, reckons the answer to that is rather 
     crude: when stockmarkets are bullish, company bosses have 
     money to spend (or can raise it more easily) and worry less 
     that shareholders will call them to account for what they do 
     with it. On this basis, suggests Mr. Shleifer, mergers have 
     often been good examples of managers acting against the 
     interests of shareholders.
       There is plenty of evidence to support this. Mergers are 
     always announced with promises of booming profits and big 
     gains in efficiency. Yet several studies have found that even 
     in the 1890s and 1920s, when firms in the same industry 
     merged to reduce competition and win monopoly power, they did 
     not achieve higher profitability. Studies of later merger 
     waves have reached similar conclusions, and found that 
     efficiency was not boosted either; indeed, some have found 
     that efficiency was actually reduced by merger. (All these 
     results are, naturally, open to debate, as they rely on 
     assumptions about what would have happened if the firms had 
     not merged.)
       The wave of conglomerate mergers in the 1960s, which 
     resulted in sprawling companies made up of often unrelated 
     businesses, had been found particularly wanting. In most 
     cases, however, problems with the new conglomerates did not 
     emerge until the mid-1970s, when the economy was decidedly 
     rocky. It is possible that the mergers would have worked had 
     the economic boom continued. But by the late 1970s, many of 
     the fashionable 1960s conglomerates were performing very 
     badly.
       Most studies have, by contrast, concluded that the 1980s 
     merger wave was beneficial. However, the cases that most 
     strongly support this conclusion were those in which 
     corporate raiders borrowed heavily, took over a conglomerate 
     that had been formed in the 1960s, and broke it up. This is 
     more of an advertisement for firms staying apart than for 
     mergers. The record of full-blown mergers in the 1980s, such 
     as Time Warner's, is less impressive.
       So far, most of this is common ground among academics. 
     Where they disagree is in their interpretation of market 
     reactions to mergers. The facts are clear enough. 
     Shareholders in acquired firms have gained on average by 20 
     percent between the announcement of a proposed deal and its 
     completion. Shareholders in buying firms, on the other hand, 
     made a gain of less than 1 percent over the same period in 
     mergers that took place before 1980; and actually suffered an 
     average loss in mergers since then.
       Such poor returns to buyers have prompted fierce debate. On 
     the one hand, the lack of any bid premium is seen as evidence 
     of the ``efficiency'' of the stockmarket. This is meant in 
     two senses. One is that a stock's price before a merger 
     announcement should incorporate expectations that the firm 
     might be involved in a merger. So a deal should not come as a 
     surprise. A second argument is that a merger proposal will 
     alert rival firms to the merits of the target, triggering an 
     auction that ensures that the seller gets the highest price 
     for his shares. That process will bid away any premium.
       Indeed, critics of the efficient-market view point to a 
     significant hole in it; the many cases in which bidders 
     actually lose money. One reason often put forward for this is 
     that the market inflicts a ``winner's curse'' (ie, the 
     auction tends to push the price too high); another, suggested 
     by Mr. Shleifer, is that managers of a successful bidder are 
     more concerned with expanding their firm than with making a 
     profit for shareholders. That makes them happy to pay over 
     the odds to capture their quarry.


                         Swings and roundabouts

       Despite all this, the combined effect of mergers on 
     acquiring and selling shareholders taken together is usually 
     positive. Since many big institutional shareholders now have 
     a stake in both parties to any transaction, they may be happy 
     to lose on the buying side in order to make bigger gains on 
     the selling one. Merger fans argue that this overall gain 
     gives them ample justification--especially since the gain 
     outweighs any costs in terms of fewer jobs (which usually 
     means little more than cuts in head-office workers), wages 
     (usually barely changed), or investment and R&D (which are 
     usually not cut significantly).
       However, the share price of a merged firm tends to fall 
     relative to the whole market in the months and years after a 
     merger, in some cases by so much that the original gain 
     disappears entirely. But the significance of this finding is 
     hotly contested. Efficient-market theorists argue that 
     changes in share prices after a merger are irrelevant, as 
     they must reflect new information. Steve Kaplan, an economist 
     at the University of Chicago, reckons that, particularly for 
     long term studies, the difficulties of defining an 
     appropriate benchmark against which to compare share-price 
     changes are so severe that any results are probably 
     meaningless.
       One more finding is worth noting. In the 1980s, shares in 
     acquiring firms performed best when the firm was heavily 
     indebted (since money was tight, managers had a strong 
     incentive to perform) and the bid was hostile, intended to 
     remove the managers of a target firm. But these are precisely 
     the deals that are not happening now, in part thanks to 
     government antipathy toward hostile takeovers and in part 
     thanks to the decline of the junk-finance market.
       There are, nonetheless, reasons to hope that the new ways 
     of mergers will not repeat earlier mistakes. Big shareholders 
     are increasingly holding company bosses to account, which 
     should make them think twice before pursuing over-priced 
     deals. Rob Visny, another Chicago economist, reckons that 
     today's relaxed anti-trust regime is helpful too, since it 
     allows firms to pursue rationalization in industries such as 
     defense and banking that might not have been allowed in the 
     1960s and 1970s. Yet the sad fact is that history is littered 
     with examples of failed mergers in the belief that this time, 
     unlike in all previous merger booms, things would be 
     different.

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