Mergers in vogue, for better or worse

CHICAGO — It's almost the return of Merger Mondays, although a little less manic.

Back in the go-go days of mergers and acquisitions in the late 1990s, deals worth billions of dollars were being announced on any given Monday, after boards had taken the weekend to give a plan their approval.

This Monday's flurry of mergers worth roughly $30 billion — including the $16 billion deal between SBC Communications and AT&T — is relatively small compared with the megamergers of a few years back.

But on the heels of last week's $57 billion announced takeover of Gillette by Procter & Gamble, it's a sign that merger and acquisition (M&A) activity is increasing, experts say.

Whether that's a good thing for shareholders is another question entirely.

Already this year, U.S. companies are involved in deals worth more than $100 billion, according to deal trackers FactSet Mergerstat. That's almost a quarter of the value of all deals announced in 2002, and on pace to be the biggest year since the $1.27 trillion in 2000.

"What's driving this overall is basically the last four years, CEOs spent most of their time avoiding risks and cutting costs," said Scott Wren, senior equity strategist with A.G. Edwards & Sons.

"We're at the point of the cycle now where they've got to spend money in order to grow. It's the need to grow, and just the quickest way to get there."

Ravi Chanmugam, head of Accenture's mergers and acquisitions practice, said many companies are struggling to expand faster than the overall growth rate of their industries.

"There's only so much you can push the company to grow on its own," he said.

Chanmugam said companies sometimes engage in "a bit of a herd mentality" when mergers start to pick up, and deals can become self-perpetuating as combined companies begin to outstrip their rivals. "It really puts the pressure on the other firms," he said.

Despite the flurry of deals in recent days, Bob Filek, a partner in PricewaterhouseCoopers' transaction-services group, said companies are approaching mergers more cautiously than they were during the late '90s.

"Governance has really become much more rigorous over the past few years," he said, adding that directors are looking closely at the quality of deals.

The need to grow, along with strong corporate balance sheets flush with cash, will most likely propel mergers and acquisitions across many sectors for some time, Wren said.

"I think you're going to see a good M&A year in '05, and probably a good M&A year in '06," he said.

Chanmugam said Accenture began to see the pickup in activity last year: "We think it's the beginning of a pretty significant increase in M&A."

One reason for the lack of activity in recent years, he said, has been that boards were grappling with a raft of new procedures from new governance rules, and many were engaged in chief-executive succession — or firing.

"The boards just had a lot to deal with. ... The last thing they wanted to do was take on someone else's problems," Chanmugam said.

Despite the hype surrounding merger announcements — cost savings, synergies and the like — the landscape is littered with failed mergers of recent years. Most research suggests that, more often than not, acquisitions don't build shareholder value.

A Chicago Tribune study of the biggest mergers of the 1990s, for example, found that two-thirds failed to deliver total shareholder returns greater than their industry peers after two years.

"They seem to be mostly motivated by hubris," said Frederic Shipley, a DePaul University finance professor and mergers expert. "These companies are convinced that bigger is better, although the financial results suggest otherwise."

Mergers fail for many reasons.

Some companies are simply mismatched while other mergers fail because of a lack of planning, poor integration and clashing cultures. A bidding war that results in too high a price can doom a merger, Chanmugam said.

Shipley said many are unsuccessful simply because the promised cost savings never materialize, although deals that are followed by spinoffs seem to fare better overall.

"The financial evidence for mergers mostly is they're worthless," he said. "The managers may end up making out, but the shareholders won't for the most part."

He has simple advice for stockholders in a company involved in a merger: "If you're getting bought up, take the money and run; if you're buying, get out."