Resisting the Urge To Merge
Although the past few years have given us a boom in mergers and acquisitions
that rivals anything we saw in the '80s or the go-go years of the '60s (when
conglomerates became all the rage), this boom has been distinct because the
vast majority of takeovers have been friendly rather than hostile. One would
like to believe this is because executives have realized that hostile takeovers
only magnify the immense problems any company faces in trying to assimilate the
operations of another, but it almost certainly has as much to do with the lofty
prices that are being offered for companies these days. (The more you're
offered, the less important independence seems to become--and rightly so, for
the most part.)
In any case, one consequence of this epidemic of friendliness is that you
don't hear the expression "X company is now in play" all that much anymore.
This expression was a staple of business thinking in the '80s, and was
epitomized by the experience of RJR Nabisco, which became the subject of a huge
bidding war after its management tried to take the company private in a
leveraged buyout. A company came into play when a buyout or acquisition offer
made the possibility of an acquisition suddenly seem likely, bringing other
potential suitors--or sharks, depending on your metaphor--into the fray.
Last week, then, Sprint came into play, when MCI WorldCom made a friendly
$93 billion offer to acquire it. Actually, we didn't know that Sprint had come
into play, since the company's board looked kindly on MCI WorldCom offer and
was, by all accounts, ready to approve it today. But this weekend, BellSouth
stepped in to trump MCI WorldCom (which, full disclosure, I own shares in) with
a $100 billion bid, and Sprint was officially on the block.
But Sprint, like any public company that isn't controlled by a small group
of shareholders, was always on the block. And that makes the whole idea
of a company suddenly being "in play" dubious. BellSouth has had years
(effectively, ever since the Telecommunications Act of 1996 was passed) in
which to make an offer for Sprint. At any point along the way, it could have
decided that merging with Sprint was in its best interests and bid. And if it
had done so a year ago, or even six months ago, it almost certainly could have
got a better price. Sprint was no more in play after the MCI WorldCom offer
than before. Its status had not changed. Only BellSouth's urgency had.
The point is that the phrase "in play" is a useful cover for the fact that
takeovers, particularly hostile ones, are often the result of companies'
panicking at the prospect of losing something they never even knew they wanted
until they realized they might not be able to have it. BellSouth, for instance,
has been singularly restrained in its approach to the merger-mania that has
swept the telecommunications industry. With the exception of a 10 percent
investment in high-speed provider Qwest, BellSouth has been content to build
its business from within. But in the space of three days it has thrown that
strategy over, in favor of a massive bid for a company that it will find very
difficult to integrate with, from both a regulatory and an operational
perspective. And it's hard to believe that this is really the way you build
shareholder value.
It's possible, of course, that BellSouth has had its eye on Sprint all
along, and was just getting ready to pounce when MCI WorldCom beat it to the
punch. But forgive me if I'm skeptical. You can't conjure a takeover bid out of
whole cloth in a couple of days and expect to have done the due diligence a
successful bid requires. And if we learned anything from the '80s, it's that
there's always a horde of investment bankers ready to convince executives that
they really can't afford to let this acquisition pass them by, and that there's
always a host of corporate executives eager to believe that bigger is
necessarily better.
The market, unsuprisingly, recognizes that the opposite is just as often
true, which is why the stocks of both MCI WorldCom and BellSouth have been
driven down since they made their respective bids. The urge to merge is a
powerful one, but resisting it is usually the smartest course. Especially when
it's an urge that seizes you only after it seizes someone else first.
